Amazon Disruption Symposium - Tycoons.comAmazon Disruption Symposium Alexa, What Happens Next? M O R G A N S T A N L E Y R E S E A R C H North America September 28, 2018 Morgan Stanley

Amazon Disruption Symposium Alexa, What Happens Next?

M O R G A N S T A N L E Y R E S E A R C H

North America

September 28, 2018

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of

Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.

For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

September 28, 2018 04:00 AM GMT

2 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2018

Table of Contents

Agenda…………………………………………………………………………………………………………… 3

Morgan Stanley Biographies…………………………………………………………………………………... 4

Presentations

Amazon: State of the Union………………………………………………………………………. 11

Food Retail: The War of Attrition Has Begun........................................................................ 31

AMZN vs. BABA and Who Will Prevail in India?.................................................................... 65

Advertising: How Does Amazon Advertising Fit and Who Loses Share?…………………….. 93

Surviving in an Amazon World.…………………………………………………………………… 97

Revisiting the AMZN Basket.………………………………………………………………………

Where Should Amazon Be Investing?.…………………….................................................... 109

Amazon Healthcare: Where Are We Now and What Happens Next?.................................... 144

Disclosures………………………………………………………………………………………….. 166


Amazon Disruption Symposium

SEPTEMBER 28, 2018 | MORGAN STANLEY | 1585 BROADWAY | NEW YORK CITY

Agenda

7:30 a.m. – 8:00 a.m. Breakfast & Registration

7:55 a.m. – 8:00 a.m. Welcome & Opening Remarks

• David Adelman, Managing Director, Director of Equity Research for the

Americas

8:00 a.m. – 8:30 a.m. Amazon: State of the Union

• Brian Nowak, Managing Director, Internet Equity Research Analyst

8:30 a.m. – 9:15 a.m. Food Retail: The War of Attrition Has Begun

• Simeon Gutman, Executive Director, Hardlines & Broadlines Equity

Research Analyst

• Dara Mohsenian, Managing Director, Household Products and

Beverages Equity Research Analyst

• Vincent Sinisi, Executive Director, Food Retailers / Distributors & Dollar

Stores Equity Research Analyst

9:15 a.m. – 10:00 a.m. AMZN vs. BABA and Who Will Prevail in India?

• Moderator: Leon Dean, Executive Director, Asia Sales


Research Analyst


10:00 a.m. – 10:15 a.m. Break

10:15 a.m. – 11:00 a.m. Advertising: How Does Amazon Advertising Fit and Who Loses Share?

• Moderator: Brian Nowak, Managing Director, Internet Equity Research

Analyst

• Andrew McLean, Managing Partner, Inventus Media Partners

11:00 a.m. – 11:45 a.m. Surviving in an Amazon World

• Moderator: Brian Nowak, Managing Director, Internet Equity Research

Analyst

• Lauren Cassel, Vice President, Branded Apparel & Footwear Equity

Research Analyst

• David Gardner, European Internet Equity Research Analyst

• Kimberly Greenberger, Managing Director, Softlines & Department

Stores Equity Research Analyst


Research Analyst

11:45 a.m. – 11:55 p.m. Lunch Break

11:55 a.m. – 12:00 p.m. Revisiting the AMZN Basket

• Joanie Kim, US Derivatives Sales Desk

• John Storey, Vice President, US Derivatives Sales Desk

12:00 p.m. – 1:00 p.m. Where Should Amazon Be Investing?

• Mark Eveleigh, Former Head of Product, Riot Games, Inc.

• Betsy Graseck, Managing Director, Large Cap Banks Equity Research

Analyst

• Adam Jonas, Managing Director, Autos & Shared Mobility Equity

Research Analyst


1:00 p.m. – 2:00 p.m. Amazon Healthcare: Where Are We Now and What Happens Next?

• Ricky Goldwasser, Managing Director, Healthcare Services &

Distribution Equity Research Analyst


• David Risinger, Managing Director, Major & Specialty Pharmaceuticals

Equity Research Analyst

• Dave Schlett, Former VP Finance, Gross Margin Planning (‘13–‘16), &

Former Market Group CFO / SVP, Employer (’08–‘13), Express Scripts

Holding Company

2:00 p.m. Closing Remarks

• Morag Sutherland, Managing Director, US Core Sales


Biographies

David Adelman Director of Equity Research for the Americas [email protected], (212) 761-6382

David Adelman is Director of Equity Research for the Americas, and is a member of the Equity Operating Committee. David joined Morgan Stanley in 1990 and is a Managing Director. Previously, David was an Associate Director of North America Equity Research, Co-Head of the Stock Selection Committee for the Americas, and was the firm’s US Tobacco Industry analyst.

David earned a B.A. in Economics and an M.B.A. in Finance and Business Policy, with Honors, from the University of Chicago.

David was the top-ranked US Tobacco Industry analyst by Institutional Investor Magazine for twelve consecutive years, and is one of the fifty-seven members of the Institutional Investor Hall of Fame. David was the Treasurer of the Little Orchestra Society, and is a member of the Visiting Committee of the College of the University of Chicago.

David and his wife Ilana live in Manhattan and have three children.


Biographies

Brian Nowak Internet [email protected], (212) 761-3365

Brian Nowak is a Managing Director at Morgan Stanley Research covering the US Internet industry, and has been named a member of the Institutional Investor All America Research team. Prior to joining Morgan Stanley, he worked at Susquehanna Financial Group and Nomura Securities, also covering the US Internet space. Prior to Nomura, he worked at Sanford C. Bernstein & Co. as part of a four-time II No. 1-ranked US Media research team. Brian began his career at PricewaterhouseCoopers LLP after graduating from the University of Michigan with a Bachelor’s degree in Business and a Master’s in Accounting. He also holds the Chartered Financial Analyst designation.

Adam Jonas Autos & Shared Mobility [email protected], (212) 761-1726

Adam Jonas is a Managing Director and leader of Morgan Stanley's Global Auto & Shared Mobility research team. Adam joined the firm's investment banking division in Chicago in 1996, specializing in corporate finance and M&A in the automotive industry. In 1999, Adam moved to Equity Research and joined the Firm's European Autos team, based in London, serving as the lead European auto analyst from 2003 to 2010. In 2010, Adam returned to the US to lead the Global Autos & Shared Mobility teams, collaborating with his research colleagues to tell the story of the future of transportation and Auto 2.0. Adam earned his bachelor's degree in business administration (with distinction) from the University of Michigan.


Biographies

Kimberly Greenberger Specialty Retail & Department Stores [email protected], (212) 761-6284

Kimberly Greenberger is a Managing Director who covers North American Specialty Apparel & Department Store retailers. She joined Morgan Stanley in 2010. Kimberly has covered the industry for 17 years, including prior positions at Citigroup, Lehman Brothers, and Credit Suisse. Before becoming an equity research analyst, Kimberly gathered industry experience working for bebe stores, inc. and the Mervyn's division of Target, Inc. Kimberly has recently been ranked No. 1 by Institutional Investor and No. 1 in the Greenwich survey. She has also been recognized for her stock-picking record, ranking highly in the 2009 Wall Street Journal "Best on the Street" survey and by Zacks Investment Research.

Simeon Gutman Retail Hardlines & Broadlines [email protected], (212) 761-3920

Simeon Gutman is an Executive Director who covers the Retail Hardlines and Broadlines industries. He joined Morgan Stanley Research in 2014 and has more than 17 years of US Retail industry research experience. Prior to Morgan Stanley, Simeon covered Retail Hardlines at Credit Suisse and before that retail stocks at Canaccord and Goldman Sachs. Simeon has received Honorable Mentions in the Institutional Investor All-America Research Poll in Retail Hardlines. Simeon holds a BA in Economics from Brandeis University and an MBA from the NYU Stern School of Business, and is a CFA charterholder.


Biographies

Ricky Goldwasser Healthcare Services & Distribution [email protected], (212) 761-4097

Ricky Goldwasser is a Managing Director at Morgan Stanley who joined the firm in 2009 and covers the Healthcare Services and Technology industry. Prior to joining Morgan Stanley, Ricky was co-head of the US Healthcare research team at UBS, where she covered Healthcare Services, Diagnostics, and Generic companies. She started her research career as an associate at Salomon Smith Barney in 1998. Ricky has ranked in the Institutional Investor All America research team for the last ten years. She holds an MBA degree from The Kellogg School of Management and a BA in Economics and Political Science from Tel-Aviv University.

David Risinger Major & Specialty Pharmaceuticals [email protected], (212) 761-6494

David Risinger, CFA, is a Managing Director in Equity Research at Morgan Stanley in New York. He has been highly

ranked in multiple Institutional Investor categories over the past 17 years, including Major Pharmaceuticals, Specialty

Pharmaceuticals, and Healthcare Distribution & Technology. Risinger rejoined Morgan Stanley as the US Major and

Specialty Pharmaceuticals analyst in April 2009 after working for 10 years at Merrill Lynch, where he was the US

Major Pharmaceutical analyst and Healthcare Team Leader. Prior to assuming coverage of Pharmaceuticals in 2002,

Risinger was a top-ranked Healthcare Distribution & Technology analyst at Merrill Lynch from 1999-2002. From 1993-

1999, David worked at Morgan Stanley, first as a Pharmaceutical research associate and then as a lead analyst

covering Pharmaceutical Services companies. David started his career in Equity Research at Dillon Read as a

Healthcare Provider research assistant in 1991 after graduating from Bucknell University with a political science

degree. He earned his Chartered Financial Analyst designation in 1995.


Biographies

Dara Mohsenian Beverages & Household Products [email protected], (212) 761-6575

Dara Mohsenian, a Managing Director, joined Morgan Stanley in 2009 to cover the Household Products and Beverages industries. He is ranked a top 3 analyst in both industries in the Institutional Investor survey and the Greenwich survey. Prior to joining Morgan Stanley, Dara covered consumer staples for a decade at JP Morgan and was an associate at Sanford Bernstein and Paine Webber. Dara holds a BA in economics from Tufts University, is a CAGNY board member, and has the Chartered Financial Analyst designation.

Vincent Sinisi Food Retailers, Foodservice Distributors, and Dollar Stores [email protected], (212) 761-1358

Vincent Sinisi is an Executive Director covering Food Retailers, Foodservice Distributors, and Dollar Stores. He was named a Runner Up in the 2016 and 2017 Institutional Investor polls. Prior to joining Morgan Stanley, he covered Retail Hardlines companies at Bank of America Merrill Lynch from 2008 to 2013. Vinnie also worked at Lehman Brothers from 2004 to 2008, primarily within Retail Hardlines. He holds a BS in finance, as well as a Business Law Certificate, from Seton Hall University.


Biographies

Betsy Graseck Large Cap Banks [email protected], (212) 761-8473

Betsy Graseck is a Managing Director covering US Large Cap Banks and is Global Head of Banks and Diversified

Finance Research. Betsy picked up US Large Cap Banks in 2002. Betsy’s awards include the Starmine #1 stock

picker in US Banks in 2018 and in US Commercial Banks in 2008 and 2009; she was the #6 stock picker in the US

across all sectors in 2009, Starmine #1 Earnings Estimator in Capital Markets in 2016, and is ranked in the

Institutional Investor poll. Betsy was Associate Director of Equity Research for TMT from 1998 to 2002, and was

ranked in the Institutional Investor All-Asia Research Team Poll while covering Japanese Banks, Brokers, and

Consumer Finance stocks from Tokyo in 1992-98. Prior to Tokyo, Betsy was a consultant in KPMG's bank group,

focusing on capital and reserve adequacy, balance-sheet restructuring, and profit-improvement projects. Betsy first

joined Morgan Stanley in 1986, after a year at Gunma Bank. Betsy received her BA in Japanese studies with a minor

in economics from Cornell University. She studied at Waseda University, has an MBA from Columbia University, and

holds the Chartered Financial Analyst designation.

David Gardner European Internet [email protected], +44-207-425-5829

David Gardner is an Equity Analyst at Morgan Stanley covering the European Internet space. David joined the firm’s Investment Banking Division in 2014. Earlier this year, David moved to Equity Research to join the European Internet team covering eCommerce, marketplaces, classifieds and conglomerates throughout Europe. Prior to joining Morgan Stanley, David worked in the Acquisitions & Divestments department at BHP Billiton in London and holds an MA (Hons) from the University of St Andrews, Scotland.


Biographies

Lauren Cassell Branded Apparel & Footwear [email protected], (212) 761-4143

Lauren Cassel is a Vice President covering the Softline Retail industry. She holds lead coverage of the Footwear industry, in addition to working with Kimberly Greenberger on the Specialty Retail and Department Store space. Lauren has covered the industry for over 6 years, joining Morgan Stanley in 2012. The team is ranked #2 on Wall Street by Institutional Investor. Lauren graduated with honors from the Carroll School of Management at Boston College with a Bachelor of Science in Finance and Economics.

Amazon: State of the Union


North America

Brian Nowak, CFA [email protected]

+1 212 761 3365

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have

a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in

making their investment decision.




Where Are We Now and What’s Changing?

1) eCommerce Penetration Accelerating as Amazon’s Share Grows

2) High Margin Revenues Fueling Ecosystem and Addressable Spend Expansion

3) Cross Hairs On: Grocery, Advertising, Logistics, Healthcare

4) Amazon vs Alibaba: Strategies Converging, eCommerce Becoming More Asset-Heavy

5) Regulatory Scrutiny Rising


Core Addressable US Retail Spend a ~$2.5tn TAM …Shifting Online

Note: US Retail Spend = USCB Retail Total (ex- building materials, gasoline stations, motor vehicles, and non-store retailers)

Sources: US Census Bureau, comScore, Forrester, Company Data, Morgan Stanley Research

12.2% 13.5% 15.5% 17.7% 20.0% 22.4%

2,379 2,440 2,485 2,521 2,557 2,594

0

500

1,000

1,500

2,000

2,500

3,000

2014 2015 2016 2017 2018E 2019E

US Retail Spend: eCommerce Mix ($bn)

US eCommerce US Retail (Offline)


As Incremental eCommerce Penetration Is Accelerating…

11.1%

111 bps137 bps

196 bps

219 bps

230 bps

238 bps

2013 2019E

2014 2015 2016 2017 2018E 2019E

US Retail eCommerce Mix Change

22.4%

Source: US Census Bureau, comScore, Company Data, Morgan Stanley Research

2010-13 Avg 100 bps/yr

2013-16 Avg 140 bps/yr

2016-19e Avg 220 bps/yr


22% 25% 27% 29% 30% 30%11% 10% 9% 8% 7% 7%

67% 65% 64% 63% 63% 63%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2017 2018E 2019E

US eCommerce Marketplace Mix %

Amazon (Less WFM) eBay Other

Note: US Retail Spend = USCB Retail Total (ex-building materials, gasoline stations, motor vehicles, and non-store retailers)

Sources: US Census Bureau, comScore, Forrester, Company Data, Morgan Stanley Research

…And Amazon’s Share of eCommerce Growing But at Slowing Clip

16 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2018 Sources: BEA PCE, Company Data, Morgan Stanley Research

Amazon Now Driving ~70% of Core Addressable US PCE Growth

17

%

29

%

49

%

69

%

66

%

61

%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2014 2015 2016 2017 2018E 2019E

Am

azo

n %

Co

ntr

ibu

tio

n t

o U

S R

eta

il G

row

th

From ~15% to ~70% in 3 Years...


$1,471

$547

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

3Q:18

Prime Non-Prime

Largely Driven by Prime, aka Behavior Modification 101

Note: Spend on Amazon data is derived from total share (among key retailers) of total online spend

Sources: Company Data, Morgan Stanley Research, AlphaWise Survey

2.7x higher spend

How much have you spent on Amazon in the past 12 months?

23%

36%

48%

53%56%

0%

10%

20%

30%

40%

50%

60%

2015 2016 2017 2018E 2019E

AMZN Prime US HH Penetration (Est.)AMZN Prime US HH Penetration (Est.)

18 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2018 Sources: Company Data, Morgan Stanley Research

And the Ecosystem Continues Expanding

Customer

Voice

IoT

Smart-Home

Faster Delivery (1-2 hrs)

Prime 1.0

Prime 2.0

Physically View/Shop

Items

Media Content Gaming

Video

Music

Easy Access In-Home

Easy Access

Out-of-home

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjT8__O4rbVAhXCXD4KHQUgBNkQjRwIBw&url=http://www.droidforums.net/threads/amazon-now-limits-prime-sharing-benefits-to-one-other-user.283513/&psig=AFQjCNG48O2YZTHk2RKw65lYVwKwLPkZXQ&ust=1501701944617412

19 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2018 Sources: Company Data, Morgan Stanley Research

Fueled by the High Margin Revenue Streams ($15bn-$45bn of EBIT)

Implied Core Retail Investment Losses ($ in bn): -3.2 -3.7 -5.5 -10.3 -12.7 -16.0 -17.5

1.1 1.4 0.9 0.7 0.7 0.22.2

4.2 4.1

12.0

18.0

26.0

3.45.9

9.6

14.4

24.7

34.0

43.5

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

AM

ZN E

BIT

($

bn

)

Total Company

High-Margin (AWS, Subscriptions, Ads, & CC)


in $ millions (U.S. Only)

US Retail Product Categories Spend ($ mn) % of Total

Grocery 836,092 13%

Personal care & household products 313,293 5%

Clothing 306,998 5%

Home furnishings & accessories 251,787 4%

Consumer electronics 225,923 4%

Jewelry & Watches 80,886 1%

Shoes 76,558 1%

Sporting goods 74,865 1%

Auto parts & accessories 68,369 1%

Eye Glasses/Contacts/Orthopedic Appliances 72,161 1%

Children's Toys and Children's Durables 67,026 1%

Pet food & pet supplies 63,727 1%

Home improvement items & tools 52,453 1%

Office & school supplies for home use 48,367 1%

Large home appliances 41,735 1%

Books 44,220 1%

Luggage 36,167 1%

Other 13,358 0%

Adj. Retail Spend (Core Categories)* 2,673,985 42%

2016

Note: Total PCE = **ex Services, Energy Goods, Motor Vehicles, Boats/Aircrafts/Motorcycles, Newspapers, Prescription Drugs and Medical Products.

Grocery and Prescription Drug figures are as of 2017 and excludes specialty pharmaceutical spend

Sources: BEA PCE, Company Data, Morgan Stanley Research

AMZN’s US Addressable Market Has Grown from Books to $6.4tn

We See Amazon Attacking a Core $2.7tn Bucket of Consumer Expenditure…

…and Expanding Into New Categories Outside of Traditional Retail and Consumer


US New/Emerging Categories Spend ($ mn) % of Total

New/Used Motor Vehicles (Autos) 1,200,000 19%

Logistics 900,000 14%

Cloud Computing Market 620,000 10%

Total Advertising (Traditional and Online) 419,421 7%

Pharmacy/Prescription Drugs 203,656 3%

Online Restaurant Delivery 221,606 3%

Industrial Supply/B2B 150,000 2%

Total New/Emerging Categories 3,714,683 58%

2016

TOTAL US OPPORTUNITY 6,388,668 100%



US New/Emerging Categories Spend ($ mn) % of Total

New/Used Motor Vehicles (Autos) 1,200,000 19%

Logistics 900,000 14%

Cloud Computing Market 620,000 10%

Total Advertising (Traditional and Online) 419,421 7%

Pharmacy/Prescription Drugs 203,656 3%

Online Restaurant Delivery 221,606 3%

Industrial Supply/B2B 150,000 2%

Total New/Emerging Categories 3,714,683 58%

2016in $ millions (U.S. Only)

US Retail Product Categories Spend ($ mn) % of Total

Grocery 836,092 13%

Personal care & household products 313,293 5%

Clothing 306,998 5%

Home furnishings & accessories 251,787 4%

Consumer electronics 225,923 4%

Jewelry & Watches 80,886 1%

Shoes 76,558 1%

Sporting goods 74,865 1%

Auto parts & accessories 68,369 1%

Eye Glasses/Contacts/Orthopedic Appliances 72,161 1%

Children's Toys and Children's Durables 67,026 1%

Pet food & pet supplies 63,727 1%

Home improvement items & tools 52,453 1%

Office & school supplies for home use 48,367 1%

Large home appliances 41,735 1%

Books 44,220 1%

Luggage 36,167 1%

Other 13,358 0%

Adj. Retail Spend (Core Categories)* 2,673,985 42%

2016

With Focus on Grocery/Advertising/Logistics/Healthcare

We See Amazon Attacking a Core $2.7tn Bucket of Consumer Expenditure…

…and Expanding Into New Categories Outside of Traditional Retail and Consumer

TOTAL US OPPORTUNITY 6,388,668 100%

Note: Total PCE = **ex Services, Energy Goods, Motor Vehicles, Boats/Aircrafts/Motorcycles, Newspapers, Prescription Drugs and Medical Products.

Grocery and Prescription Drug figures are as of 2017 and excludes specialty pharmaceutical spend



46%

17%

21%

10%

15%

13%

6%

21%

6%

6%

6%

32%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

AMZN CY22 BABA FY23

Re

ven

ue

by

Cat

ego

ry %

1P (Online/Store) Logistics/Other Cloud

3P Commission Subscriptions Advertising

$477 bn $140 bn

<- AMZN 3P FBA

<- AMZN 1P

Cainiao Logistics ->

1P New Retail Stores->

64%

6%

11%

5%

10%

5%

7%

30%

5%

8%

2%

46%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

AMZN CY17 BABA FY18

Re

ven

ue

by

Cat

ego

ry %



$178 bn $37 bn

Customer Mgmt ->(Marketing service

on Taobao)

<- AMZN 1PGMV/Rev

Note: Revenue definitions

1P = AMZN (1P GMV, WFM) and BABA (Hema, Intime, Other)

Logistics/Other = AMZN (FBA and shipping revenues, credit card) and BABA (Cainiao, Ele.me, and Initiatives)

Cloud = AMZN (AWS) and BABA (AliCloud)

3P Commission = AMZN (3P take rate) and BABA (China retail commissions, Int’l retail, and China/Int’l wholesale)

Subscriptions = AMZN (Subscription revenue: Prime, Audible, Music, Twitch) and BABA (Digital Media: Youku, UCWeb)

Advertising = AMZN (Majority of Other Revenue: Sponsored Listings and Display Ads) and BABA (China Retail Customer Management fees)


Amazon vs Alibaba: Global Strategies Converging as Battle Lines Being Draw

AMZN Is Still Primarily a 1P Platform, While BABA Runs on Advertising…

…but We See the Business Models and Revenue Mixes Converging


And Core Investment Themes Are Converging

Investments

Omnichannel • Acquired WFM for ~$13bn

• Cashier-less Amazon Go stores now

live…reports of 3k coming next 3 years

• Sears/Kohl’s/Best Buy retail partnerships

• Amazon reportedly acquiring 49% stake in

India Grocery chain, More

• “New Retail” initiatives

• Covering four major product categories first, with

TAM at US$5.3bn by 2020E

Logistics • ~$1.5bn air hub in Kentucky

• AMZN has added a fleet of planes, trains,

trucks, freight licenses, etc.

• Prime Now 2-hour delivery available in 40

US cities (Prime Now WFM in 48)

• ~$1.5bn air hub in Hong Kong International Airport

• Cainiao: logistics data platform covers 70%+ parcels

in China. Planned investment of $15bn over 5 years

• O2O/Food delivery: acquisition of Ele.me (~$9.5bn

latest valuation)

Video/Content • ~$6.5bn in content spend in 2018

• In 4Q16, launched Prime Video to 200

countries around the world

• China: Youku Tudou #3 largest online video platform

• In’tl: UCWeb gaining popularity in India and

Indonesia

Voice/IoT/

Hardware

• Thousands of engineers on Alexa

• Echo devices promotions, sold near cost

• Acquired Ring ($900mn) / Blink ($90mn)

• AI: Alibaba’s smart speaker Tmall Genie, powered

by its own voice interaction system AliGenie

• Autonomous Driving: YunOS, in-car smart system

Payments/

Financial Svcs

• 5% back on Amazon Prime rewards card on

marketplace and Whole Foods stores

• SME financing to 3P sellers (>$1bn in 2017)

• AliPay: #1 mobile payment tool; also provides

comprehensive financial services (consumer credit,

SME loan, wealth management)

Sources: Alizia, Company Data, Morgan Stanley Research;


2,674

5,321

3,715

1,4236,389 6,744

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

AMZN (US) BABA (China)To

tal A

dd

ressab

le M

ark

et

($ b

n)

Core New categories

Note: AMZN US Core (Adjusted PCE) and New Categories (autos, cloud, advertising, etc)

BABA China Core (Adjusted PCE) and New Categories (Internet financing, food delivery, etc)

Sources: BEA PCE, NBS China, Company Data, Morgan Stanley Research

And So While TAMs Are Expanding…


…Expect Continued Heavy Investment as eCommerce Becomes More Asset Heavy

We Estimate AMZN ’18 Retail Investment Will Increase $25bn+ Driven by Fulfillment…

…with BABA Increasing ’18 Opex by 53%, Investing $3bn in S&M and Product Innovation

Sources: Company Data, Morgan Stanley Research


And Regulatory Scrutiny May Be on the Rise – Amazon

“President Trump escalated his attack on Amazon on

Thursday…strongly suggesting that he may use

the power of his office to rein in the nation’s largest eCommerce business.”

“Amazon.com Inc. risks

following in the footsteps of Google after the European Union’s antitrust chief said

regulators are asking how the online retailer is treating

smaller rivals trading on its own website.”

“The problem, Warren says, is that Amazon gets the data

from all of these sales and doesn't necessarily share it… Amazon can then create its own market conditions and

develop a private-label brand.”

New York Times

3/29/18

Business Insider

9/14/18

Bloomberg

9/19/18

“By focusing on the threat to small businesses, Mr. Trump

has touched on the unease of Amazon’s disruptive force. The company has changed

industries as varied as publishing, groceries and

health care.”

“Warren said that, ultimately, Amazon should not be in both

businesses.”

“…some lawmakers raised questions about Amazon’s

deep pockets and its ability to undercut the prices of smaller

competitors.”

“In the last year, Amazon has added antitrust to its roster of issues, hiring a former senior

Senate staff member who helped shape antitrust

policies.”

New York Times

9/20/18

“…the EU is checking how Amazon gathers information on sales made by competitors on Amazon Marketplace and whether that gives it an edge

when it sells to customers”

Note: Amazon to our knowledge has not commented on the indicated news reports

Source: New York Times, Business Insider, Bloomberg, Morgan Stanley Research


And Regulatory Scrutiny May Be on the Rise – Facebook

“A German consumer rights group said…that a court had

found Facebook’s use of personal data to be illegal

because the U.S. social media platform did not adequately secure the informed consent

of its users.”

“American technology giants such as Facebook Inc. will

continue to face regulatory pressure in Europe,

Germany’s antitrust chief warned.”

“Britain is investigating whether Facebook did

enough to protect data after a whistleblower said a London-based political

consultancy hired by Donald Trump improperly accessed information on 50 million Facebook users to sway

public opinion.”

Reuters

2/12/18

Reuters

3/20/18

Bloomberg

8/27/18

“The Federation of German Consumer Organisations said

that Facebook’s default settings and some of its terms

of service were in breach of consumer law, and that the court had found parts of the consent to data usage to be

invalid.”

“’The possibility that Facebook has either not been transparent with consumers

or has not been able to verify that third party app

developers are transparent with consumers is troubling,’”

“Online platforms are under pressure in Europe because of

their dominance and anti-competitive business practices, which have

resulted in hefty fines handed down to some companies.

Privacy and consumer concerns have also

aggravated the situation.”

“Facebook may face sanctions because it has yet to comply with EU consumer rules…in

response to regulatory demands”

Bloomberg

9/19/18

“Mundt is optimistic of taking "the next steps" by the end of

the year in the Facebook probe – which has focused on

how the social network utilizes some user

information and whether it does so by taking undue advantage if its market position in Germany.”

Note: Facebook to our knowledge has not commented on the indicated news reports

Source: Reuters, Bloomberg, Morgan Stanley Research


And Regulatory Scrutiny May Be on the Rise – Alphabet

“[Google], through its search design, had placed its

commercial flight search function at a prominent

position on the search results page to the disadvantage of

businesses trying to gain market access.”

“The EU’s investigation targets contracts that require

smartphone makers who want to install Google’s Play

store to add a bundle of Google services.”

“Brussels is preparing new EU-wide regulations that will

specifically regulate online platforms and search engines for the first time, as it looks to

bolster the rights of businesses and app makers”

Reuters

2/8/18

FT

3/14/18

Bloomberg

7/14/18

“Whilst finding Google to have abused its dominant

position, the CCI has nonetheless exercised

restraint in recognizing the dynamic nature of online markets and not found Google guilty of every

allegation.”

“European policymakers have been considering ways to target ‘harmful’ trading practices that allow tech giants to impose unfair trading conditions on

companies that rely on their platforms.”

“Under the plans, the tech groups would be required to

provide companies with more information about how their

ranking algorithms work.”

“Big tech companies…have faced criticism from

Republicans and Democrats for everything from

widespread collection of users’ information to being used by Russia to meddle in

the 2016 U.S. election”

“The chairman of the Federal Trade Commission …signaled …he was willing to consider

tougher enforcement, a move that could affect high profile

big tech companies”

CNBC

9/13/18

“Google also argues that its actions to police the Android

ecosystem and prevent multiple versions of Android –

also part of the EU probe – help app developers to make

products that work across millions of devices.”

Note: Alphabet to our knowledge has not commented on the indicated news reports

Source: Reuters, Financial Times, Bloomberg, CNBC, Morgan Stanley Research


What Is Our View on Regulatory?

• Expect “Regulate Tech” Drumbeat to Remain Loud into 2020 Presidential Election…

• …What Will Big Tech (AMZN/GOOGL/FB) Argue?

1) Currently not Breaking any Antitrust Laws

2) Important to US Job Creation

3) Important to Small and Medium-sized Businesses

4) Do We Want to Regulate our Tech Leaders as China Becoming More Competitive Globally?

5) Amazon’s HQ2?


AMZN’s Importance to US Jobs and SMBs

Sources: Amazon 2018 SMB Impact Report

• Since 2011, AMZN has invested over $150bn worldwide in its fulfillment/transportation/tech infrastructure

• Globally, Amazon estimates it has created more than 900,000 jobs

• Amazon has created over 1.7mn direct and indirect jobs globally

• In 2017, more than 300,000 SMBs in the US started selling on Amazon

Food Retail

The War of Attrition Has Begun


North America


+1 212 761 3365

Simeon Gutman, CFA [email protected]

+1 212 761 3920

Vincent Sinisi [email protected]

+1 212 761 1358

Dara Mohsenian, CFA [email protected]

+1 212 761 6575







What’s Changed? – 1) AMZN Introduces Free 2-hr Grocery Delivery from Whole Foods for Prime Members…

Source: Company Data, Google Facts, Morgan Stanley Research

04

610

1923

28

48

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

10

20

30

40

50

60

Aug-17 Feb-18 Mar-18 Apr-18 Jun-18 July-18 Aug-18 Sep-18

Perc

en

tag

e o

f U.S

. Po

pu

latio

n

Ad

dre

ssed

by W

FM

Prim

e N

ow

Nu

mb

er

of

Cit

ies w

ith

Pri

me N

ow

In

teg

rate

d i

nto

Wh

ole

Fo

od

s

Total Number of cities % U.S. population addressed

• In the 8 months since launch, Whole Foods Prime Now can now reach ~17% of the U.S. population


…And 1-2 Hour Prime Now Moving Needle Too

Sources: AlphaWise Survey, Morgan Stanley Research

19%

38%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

3Q:17 3Q:18

Has your household used Prime Now?

Note: percentages reflect a percentage of Prime subscribers

• 5%/8% of US/UK Prime members surveyed listed Prime Now as the main reason for signing up for Prime

• Prime Now rolled out in 40 US Markets…integrated into Whole Foods in 48 Markets


And We Think AMZN Can Operate Prime Now Profitably

Source: Morgan Stanley Research, Company Data

PrimeNow Grocery Delivery Unit Economics

Prime Now

Amazon Unit Economic P&L

$ Average Order Value (AOV) $120.0

x Avg WFM Gross Margin (post ~6% Price Cut) 30%

= Total Gross Profit $36.00

- Pick and Pack $4.17

- Delivery Wage Costs $5.00

- Other Delivery Costs (Truck/Fuel/OH) $4.49

= Order Gross Profit $22.34

Order Margin 19%

~$4.25 ~$9.50

$22


What’s Changed? – 2) WFM Prices Are Beginning to Fall, Particularly for Prime Members…

Source: Bare International, Morgan Stanley Research

• Prime members can get an additional 10% off most sale products as well as deep discounts on select items

• Using the Amazon Visa card gets you an extra 5% cash back on all your Whole Foods purchases

-5.3%

-2.2%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18

WFM Pricing Y/Y Change AMZN-WFM Deal Closed

0%

5%

10%

15%

20%

25%

30%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

% Premium to the Regional Conventional Average

2016 2017 2018


…And Price Remains Primary Reason for Consumers to Not Shop at Whole Foods

Source: AlphaWise, Morgan Stanley Research, Company Data

… While Prices Have Begun to Come Down, Pricing Continues to be the Primary Reason Consumers Don't Shop at Whole Foods


What’s Changed? – 3) AMZN Reportedly Planning to Open 3,000 Go Stores in 3 years

Source: Bare International, Morgan Stanley Research

• Amazon continues to push its omni-channel focus on Grocery

• Could allow Amazon to further penetrate “quick-serve” items like prepared sandwiches and one-off purchases

Avg. Investment Cost per Amazon Go Store ($ mn)

(Sprouts) (Whole Foods)

$113 $182 $250 $319 $387

1,600 $0.2 $0.3 $0.4 $0.5 $0.6

1,800 $0.2 $0.3 $0.5 $0.6 $0.7

2,000 $0.2 $0.4 $0.5 $0.6 $0.8

2,200 $0.2 $0.4 $0.6 $0.7 $0.9

2,400 $0.3 $0.4 $0.6 $0.8 $0.9

Avg

. S

q.

Ft.

per

Sto

re

Avg. Investment Cost per Sq. Ft. ($)

Go stores so far are ~2,000 sq ft. We estimate a cost of $0.2mn to $0.9mn per store…

…which implies a total upfront cost of $500mn to $3bn to build 3,000 Go Stores

Total Investment Cost to build 3,000 Amazon Go Stores ($ mn)

(Sprouts) (Whole Foods)

$113 $182 $250 $319 $387

1,600 $545 $873 $1,201 $1,529 $1,858

1,800 $613 $982 $1,351 $1,720 $2,090

2,000 $681 $1,091 $1,501 $1,912 $2,322

2,200 $749 $1,200 $1,651 $2,103 $2,554

2,400 $817 $1,309 $1,802 $2,294 $2,786

Avg. Investment Cost per Sq. Ft. ($)

Avg

. S

q.

Ft.

per

Sto

re


Grocery Is Setting Up to Be an Epic Trillion-Dollar Battlefield

Sources : US Census Bureau, Morgan Stanley Research

Industry Revenues Industry EBIT dollars


Why Now? Disruption Is Accelerating

Sources : Morgan Stanley Research

Grocer Actions

Walmart

Doubling Click & Collect locations from 1,100 in 2017 to ~2,000 by year end.

Potential to be in all 4,700 locations in a few years. Expanding delivery

options.

KrogerIncreasing Click & Collect locations from 1,000 in 2017 to ~1,600 by year end.

Partnering with Ocado for delivery. Launching Kroger Ship.

AldiPartnering with Instacart to rollout delivery capabilities nationwide. To be

available in 35 states by Thanksgiving 2018.

TargetRolling out Shipt (same day delivery service) nationwide. Recently added

California in September 2018.

Amazon/Whole

Foods

Increased number of locations offering free Prime 2 hour delivery to 48

markets (vs. 4 in February). Reportedly planning to open 3,000 Go locations

over next few years.


AlphaWise Evidence Points to Increased Consumer Adoption of Online Grocery

Consumers seem more willing to shop online… …particularly among Prime Customers

Sources : AlphaWise, Morgan Stanley Research


A Multi-Pronged Battle

Sources : Morgan Stanley Research

Food Retail Industry

Online Hard Discounters

Mass

Traditional

Club

-10 bps / year of Price Investments

Aldi, Lidl

Costco, BJ's

Kroger, Ahold

Amazon, Instacart

Walmart, Target


We Introduce a Framework to Quantify Grocery Disruption

High Online Adoption

HigherCompetition

Low Online Adoption

HighCompetition

High Adoption, Pace of Price Investments Continues

High Adoption, Pace of Price Investments Accelerate

Low Adoption, Pace of Price Investments Continues

Low Adoption, Pace of Price Investments Accelerate

Bear Case: Most Disruption

Bull Case:Least Disruption

Base Case

ModestDisruption

EBIT impact: 18 bps / year

EBIT impact: 8 bps / year EBIT impact: 16 bps / year

EBIT impact: 30 bps / year

Sources : Company Data, Morgan Stanley Research


Quantifying Gross Margin Headwinds from Price Investments


Case studies show that every bp of disruptor share gain

equates to 0.25 bps of industry gross margin contraction

If hard discounters were to gain ~200 bps of share in the US,

it could drive a cumulative 50 bps impact to gross margins

Case StudyWMT disrupts

the US

Aldi/Lidl

disrupts the UKAverage

Time Period 2001-2014 2011-2017 9.5 years

Total GM Erosion (bps) -241 -207 -224

per year -19 -34 -27

Total Share Gain (bps) 1,045 759 902

GM Erosion / Share Gain (bps) -0.23 -0.27 -0.25

(Avg GM Erosion) x (Est Hard Discounter Share Gain) = Cumulative Price Investments


Quantifying Margin Impacts from Online Mix Shift


We estimate it costs between $12-14 to fulfill online orders

In-Store Delivery C & C

$ Average Order Value $110.00 $110.00 $110.00

x Est'd Grocer GM 25% 25% 25%

= Total Gross Profit $27.50 $27.50 $27.50

- Pick and Pack $0.00 $4.17 $4.17 $12.50/hr, 20 mins. Per order

- Stage and Deliver $0.00 $0.00 $4.17 $12.50/hr, 20 mins. Per order

- Driver Wages $0.00 $5.00 $0.00 $15/hr, 20 mins. Per order

- Fuel and Other $0.00 $4.49 $0.00 $3/gal; 9 hrs/day; $75 in overhead

Total Fulfillment Costs $0.00 $13.66 $8.33

% Borne by retailers NM 75% 100%

= Order Gross Profit $27.50 $17.26 $19.17

Gross Margin 25.0% 15.7% 17.4%

Consumers bear some of the cost of

fulfillment


Total Impact to Industry EBIT Margins Through 2023



Share Gains Should Separate the Winners from the Losers


Top 20 players should gain share


Stock Implications: Walmart (WMT, Equal-weight)


Puts and takes to initiatives

Walmart Initiatives

Gross Margin Headwinds Comment

Price InvestmentsWMT has indicated that they would not be

beaten on price

Click and Collect (C&C)C&C gross margins are in the mid teen range

vs. in store gross margin in the 20%s

Online deliver/Delivery via Uber WMT is testing delivery options

Gross Margin Tailwinds Comment

Private label brandsPrivate label brands tends to carry a 1,000 bps

margin adv over branded goods

Product procurement benefitsGiven scale, WMT is one of the lowest cost

procurers

Scan and GoAdding the capability to scan and pay via a

phone could reduce the need for in store labor

Industry disruption and investments should pressure margins


Stock Implications: Kroger (KR, Equal-weight)

• Lean incrementally more cautious; we meaningfully lower our EBIT and EPS forecasts, now well below consensus (6.5% / 19% below in ’19 / ’20)

• We also raise ID sales forecasts through 2023 on increased conviction that KR's initiatives will

accelerate share gains + sustain KR's position as leading conventional grocer


3.6%

5.2%5.0%

1.0%0.7%

1.8%

2.5%

3.0%

3.5%

4.0% 4.0%

1.9%2.2%

2.4%

3.0%2.8%

0%

1%

2%

3%

4%

5%

6%

'13 '14 '15 '16 '17 '18e '19e '20e '21e '22e '23e

KR ID Sales Growth MSe Consensus

2.8%3.0%

3.3%3.1%

2.8%

2.4%2.3%

2.2%2.1%

2.0%1.9%

2.3% 2.3%

2.3%2.4% 2.5%

0%

1%

2%

3%

4%

'13 '14 '15 '16 '17 '18e '19e '20e '21e '22e '23e

KR Total Company EBIT Margin MSe Consensus

-35 bps-20 bps

-22 bps 1.6%

+20 bps

2018e Ex-FuelEBIT Margin

2023e Ex-FuelEBIT Margin

Private LabelPrice

Investments Online Mix ShiftSG&A

Deleverage

2.1%

’18-’23e ex-fuel EBIT margin build


Stock Implications: Kroger (KR, Equal-weight) (cont.)

• Reflecting higher potential volatility around our Base Case forecasts, we significantly widen our risk / reward skew, lowering Bear Case to $7 (from $16) and raising Bull Case to $50 (from $42)

• Stock performance likely hinges on whether investors reward accelerating sales growth / share gains or punish structurally lower margins; more clarity on bottom line needed for investors to value stock


KR Industry

Bear Base Bull Base

'19-'23e Avg ID Sales 0.8% 3.4% 4.6%

'19-23e Annual Ex-Fuel GM Chg -17 bps -7 bps -1 bps -14 bps

2023e Ex-Fuel GM 22.9% 23.4% 23.7%

'19-23e Annual Ex-Fuel EBIT Margin Chg -26 bps -10 bps 3 bps -18 bps

2023e Ex-Fuel EBIT Margin 0.7% 1.6% 2.4%

'18-23e Ex-Fuel EBIT CAGR -15.4% -2.1% 6.0%

2023e EPS $0.94 $2.24 $3.67

'18-23e EPS CAGR -13.5% 1.3% 11.0%

2019e EPS $1.91 $2.25 $2.58

Implied 2019e P/E Multiple 4x 12x 19x

DCF Per-Share Value $7 $27 $50

% Upside / Downside -77% -9% 68%


Private Label


A Brief Overview of Amazon’s Private Label Efforts

Source: Company Website, Forbes, Business Insider, ReCode

Year Product Line Introduced

2005 Pinzon introduced as Amazon's first private label brand to sell textiles and household goods

2007 Pinzon trademark expanded to cover a more diverse listing of products including paints, carpets, clothing, footwear

2009 AmazonBasics launched to sell home and office accessories

2014 Amazon Elements launched to sell domestic products and supplements

2017 Wickedly Prime launched to sell snack foods

2017 WFM 365 brought into AMZN's private label after their WFM acquisition

2018 Wag launched to sell pet products

2018 Basic Care launched to sell OTC Medication


Amazon Is Increasingly Pushing into Private Label…

Source: Company Website

• A Sample Search for Cereal Shows Sponsored Products, Then Private Label, and Then Organic Search Results

Sponsored Product Ads

AMZN Private Label Items

Organic Results


…with Over 80 Brands…



…Across Multiple Categories

Source: One Click Retail, Company website as of September 15, 2018

Category # items

Automotive 28

Electronics & Accessories 404

Furniture 127

Home 442

Home Office & Small Business 441

Lighting & Décor 511

Women's Apparel 2,000+

Men's Apparel 897

Boys' Clothing 282

Girls' Clothing 307

Baby 402

Pets 31

Food & Beverages 246

Beauty & Personal Care 487

Health & Wellness 275

Household Essentials 29

Luggage & Travel 47

Sports & Outdoors 91

40

80

0

10

20

30

40

50

60

70

80

90

100

July 2017 July 2018

Number of Amazon Private Labels


The PL Opportunity? ~18% of Retailers’ Revenue with ~600bp Higher Margins

Source: Company Data, Morgan Stanley Research

Retailer Category Gross Margin Benefit

Dept. Stores 300-500bp

Hardlines 500-800bp

Food Retailers 500-800bp

Average 567 bp

% of Revenue

Company from Private Label

Kohl's 46%

JC Penney 44%

Target 33%

Smart & Final 28%

Kroger 25%

Macy's 20%

Lowe's 20%

Costco 20%

Petsmart 20%

Office Depot 20%

Dollar General 20%

Dollar Tree 20%

Walmart 15%

Nordstrom 12%

Sprouts 11%

Ulta 6%

Best Buy 5%

Bed Bath and Beyond 5%

AVERAGE 18%


Private Label Momentum within US Grocery Is Accelerating


In 2017/18TD Private Label Has Driven ~66% of Total US Grocery Dollar Growth in Tracked Channels Despite Representing <20% of Sales


In Our Base Case We Forecast Private Label Share of Grocery Rising ~500 bps to ~25% of US Grocery Sales or ~1,000 Bps in a Bull Case

Source: Company Data, Euromonitor, Morgan Stanley Research

Where the Food Retail Footprint Is More Consolidated, Private Label Penetration Is Much Higher (~36% in the UK)

Top US Food Retailers Have PL Penetration Rates Well Above the US Average

19%

26%

23%

30%

0%

5%

10%

15%

20%

25%

30%

35%

Total US Grocery(Nielsen xAOC+C)

Kroger (2017) Other LargeRetailer (2017)

Other LargeRetailer (Target)

US Private Label Sales Penetration

+1100bps+400bps+700bps36.4%

34.8%

23.2%

20.9%

16.3%15.6%15.4%

13.1%11.9%

10.5%9.6%

8.1%

5.0% 4.8%3.0% 2.6% 2.0% 1.5% 0.8% 0.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

UK DEU FRA AUS USA ITA ZAF CAN World TUR JPN ARG KOR RUS IDN SAU MEX BRA CHN IND

Packaged Food PL Penetration by Geography (Euromonitor)

Avg. 11.8%


Private Label Has Been a Key Beneficiary of the Shift in Consumption to Perimeter Departments From Center of Store


Private Label Significantly Overindexes to the Perimeter of the Store

The Perimeter Segment Has Consistently Gained Volume Share Within Total Grocery

26.0% 26.4% 26.8% 27.2% 27.5%

74.0% 73.6% 73.2% 72.8% 72.5%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

2014 2015 2016 2017 2018TD 2014 2015 2016 2017 2018TD

Total Food and Beverage: Unit Share

Perimter Center of Store

+150 Bps

-150 Bps

31.7%

16.0%

20.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Perimeter Center of Store Total Store

Private Label Unit Share by Location


Large Retailers Have Substantially Increased Private Label Penetration and Are Capitalizing on Shifting Consumption to Natural/Organic Products


Two Store Brands Delivered ~72% of the 2017 Dollar Growth Delivered by 9 Large Package Food Companies

Private Label Value and Volume Share as a % of Total Kroger Grocery Sales Has Increased Materially

24.9%

26.3%26.6%

28.5%

23%

24%

25%

26%

27%

28%

29%

value volume

Kroger Private Label Dollar/Volume Share1H14 1H18

+175 bps

+220 bps

-

100

200

300

400

500

600

700

Package Food Peer Set… Simple Truth + O Organics

2017 Incremental Natural/Organic/Non-GMO Dollar Sales

+450mm

+$615mm~72% of Package

Food Peer Set


We Believe US Food Companies Have Opened the Door For Private Label Via Widening Branded Price Gaps…


36.4%37.2% 36.8%

39.5%

42.2%

30.0%

32.0%

34.0%

36.0%

38.0%

40.0%

42.0%

44.0%

2014 2015 2016 2017 2018TD

Weighted Average Food Companies Price Premium Relative to Private Label

Up ~610 bps or ~17% KHC

SJM

GIS

CPB

KMDLZ

HSY

(150)

(100)

(50)

-

50

100

150

200

-20% -10% 0% 10% 20% 30% 40% 50% 60%

% Change in Price Premium to PL (2018TD vs 2014)

Culmulative PL Market Share Bp Change (2014-2018TD)

R squared = 51%

…Which Has Had a Direct Correlation with Private Label Share Gains

Branded Price Gaps Have Widened vs. Private Label…


…and Reduced Brand Support


6.2%

5.9% 5.9%

5.7%

5.2%

4.9%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

2012 2013 2014 2015 2016 2017

Average Food Advertising as a % of Sales

Avg. (ex-KHC) Avg. (with-KHC) -130 bps as a % of sales and down -33% in absolute dollars


We Believe Food, and to a Lesser Extent HPC, Is Most Exposed to Private Label


PL Penetration Is Highest at KHC, Followed by CLX; PL Momentum Is Greatest at KHC, Followed by CPB

Weighted Average US Scanner Data Private Label Penetration Is Higher in Package Food Than Other CPG Verticals

13.1% 12.9%

6.6%

36 36

0

-10

-5

0

5

10

15

20

25

30

35

40

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Food HPC Beverages

Company Weighted Avg. Private Label Market Share

2017 PL Share (%) 2018TD YoY Change (bps)

21.2%

17.7%

15.1%

12.7% 12.5%10.7%

8.9%

3.5%

83

4417

55

29

10 -132

-20

0

20

40

60

80

100

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

KHC CLX SJM CPB CHD GIS K HSY

Company Weighted Avg. Private Label Market Share

2017 PL Share (%) 2017/2018TD YoY Change (bps)


9.7%

7.8%6.8%

3.4%2.3% 2.2%

1.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Global E-Commerce Sales Mix by Category

12.0%11.0%

9.9%

4.2%3.0% 2.4%

1.2% 1.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

US E-Commerce Sales Mix by Category

CPG eCommerce Penetration by Category

Source: Euromonitor as of 2017

Global eCommerce Penetration by Category US eCommerce Penetration by Category


Food Retail: A 10 Year Journey?

Industry/Business

Model Bespoke Products

Regulatory Hurdles

Attention Post Sale/ Service Element

Nuances/Complexities Behind Transaction

B R I A N

Most Protected Most Exposed

Household Products

Food Retail Dollar Stores

Broadline Retail

HP

C/

Be

ve

rag

es

Fo

od

Re

tail

/ D

oll

ar

Sto

res

Ha

rdli

nes

/ B

roa

dli

nes

Club

Food Distributors

Fo

od

an

d

To

ba

cc

o

Sources: Morgan Stanley Research

Packaged Foods

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjjz5HVtJ3WAhXhx4MKHS6jDeoQjRwIBw&url=https://www.2ndvote.com/business-entity/dollar-general/&psig=AFQjCNEsuj9ts0MZb3_0YmOP_l4_eghZ6g&ust=1505228861338017

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http://corporate.walmart.com/

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwio6taJv53WAhWHXBQKHYgeBqwQjRwIBw&url=https://commons.wikimedia.org/wiki/File:Target_logo.svg&psig=AFQjCNEAQ_0Y53KCbZ0SHe4Lh6gblPKlUg&ust=1505231665568097

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AMZN vs. BABA M O R G A N S T A N L E Y R E S E A R C H

North America


+1 212 761 3365







What About Amazon vs Alibaba?

1) Strategies Converging around 1P/Omnichannel and Logistics 2) AMZN/BABA Now Driving ~66%/32% of Incremental Addressable Consumer Expenditure in US/China 3) By 2027, BABA’s China Opportunity Set to Be 1.8X Larger Than AMZN US Addressable Spend 4) Emerging Market Battlegrounds Forming: AMZN ahead in India, BABA ahead in ASEAN, and both players planting seeds in LATAM/Australia

Note: Alibaba Group Holding (BABA) is covered by Grace Chen


2,674

5,321

3,715

1,4236,389 6,744

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000


tal A

dd

ressab

le M

ark

et

($ b

n)

Core New categories

26%

22%22%

31% 32% 30%

17%

29%

49%

69%66%

61%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2014 2015 2016 2017 2018E 2019E

Co

ntr

ibu

tio

n %

to

Re

tail

Gro

wth

BABA (China) AMZN (US)

Note: Excludes Whole Foods and Hema/TP Stores


Both Have Leading Businesses in Their “Home Markets” and Are Investing to Expand Their Offerings…

But Investments Could Potentially Grow the Companies’ TAMs in Their “Home Markets”

AMZN Driving 2/3 of US Retail Growth... While BABA Contributes ~1/3 to China Retail Growth


Note: Revenue definitions

1P = AMZN (1P GMV, WFM) and BABA (Hema, Intime, Other)

Logistics/Other = AMZN (FBA and shipping revenues, credit card) and BABA (Cainiao, Ele.me, and Initiatives)

Cloud = AMZN (AWS) and BABA (AliCloud)

3P Commission = AMZN (3P take rate) and BABA (China retail commissions, Int’l retail, and China/Int’l wholesale)

Subscriptions = AMZN (Subscription revenue: Prime, Audible, Music, Twitch) and BABA (Digital Media: Youku, UCWeb)

Advertising = AMZN (Majority of Other Revenue: Sponsored Listings and Display Ads) and BABA (China Retail Customer Management fees)


Global Strategies Converging as Battle Lines Being Drawn

AMZN Is Still Primarily a 1P Platform, While BABA Runs on Advertising…

…but We See the Business Models and Revenue Mixes Converging

46%

17%

21%

10%

15%

13%

6%

21%

6%

6%

6%

32%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

AMZN CY22 BABA FY23

Re

ven

ue

by

Cat

ego

ry %



$477 bn $140 bn

<- AMZN 3P FBA

<- AMZN 1P

Cainiao Logistics ->

1P New Retail Stores->

64%

6%

11%

5%

10%

5%

7%

30%

5%

8%

2%

46%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

AMZN CY17 BABA FY18

Re

ven

ue

by

Cat

ego

ry %



$178 bn $37 bn

Customer Mgmt ->(Marketing service

on Taobao)

<- AMZN 1PGMV/Rev


And Core Investment Themes Are Converging

Investments

Omnichannel • Acquired WFM for ~$13bn

• Cashier-less Amazon Go stores now

live…reports of 3k coming next 3 years

• Sears/Kohl’s/Best Buy retail partnerships

• Amazon reportedly acquiring 49% stake in

India Grocery chain, More

• “New Retail” initiatives

• Covering four major product categories first, with

TAM at US$5.3bn by 2020E

Logistics • ~$1.5bn air hub in Kentucky

• AMZN has added a fleet of planes, trains,

trucks, freight licenses, etc.

• Prime Now 2-hour delivery available in 40

US cities (Prime Now WFM in 48)

• ~$1.5bn air hub in Hong Kong International Airport

• Cainiao: logistics data platform covers 70%+ parcels

in China. Planned investment of $15bn over 5 years

• O2O/Food delivery: acquisition of Ele.me (~$9.5bn

latest valuation)

Video/Content • ~$6.5bn in content spend in 2018

• In 4Q16, launched Prime Video to 200

countries around the world

• China: Youku Tudou #3 largest online video platform

• In’tl: UCWeb gaining popularity in India and

Indonesia

Voice/IoT/

Hardware

• Thousands of engineers on Alexa

• Echo devices promotions, sold near cost

• Acquired Ring ($900mn) / Blink ($90mn)

• AI: Alibaba’s smart speaker Tmall Genie, powered

by its own voice interaction system AliGenie

• Autonomous Driving: YunOS, in-car smart system

Payments/

Financial Svcs

• 5% back on Amazon Prime rewards card on

marketplace and Whole Foods stores

• SME financing to 3P sellers (>$1bn in 2017)

• AliPay: #1 mobile payment tool; also provides

comprehensive financial services (consumer credit,

SME loan, wealth management)

Sources: Alizia, Company Data, Morgan Stanley Research;


2,674

5,321

3,715

1,4236,389 6,744

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000


tal A

dd

res

sa

ble

Ma

rke

t ($

bn

)

Core New categories

Note: AMZN US Core (Adjusted PCE) and New Categories (autos, cloud, advertising, etc)

BABA China Core (Adjusted PCE) and New Categories (Internet financing, food delivery, etc)


And So While TAMs Are Expanding…


…Expect Continued Heavy Investment as eCommerce Becomes More Asset Heavy

We Estimate AMZN ’18 Retail Investment Will Increase $25bn+ Driven by Fulfillment…

…with BABA Increasing ’18 Opex by 53%, Investing $3bn in S&M and Product Innovation

Sources: Company Data, Morgan Stanley Research


6,3897,788

3,408

4,258

4,936

9,797

16,982

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2017 2027

AM

ZN C

on

sum

er

Re

tail

Spe

nd

($

bn

)

Domestic Core (Int'l) Int'l Expansion

Increase in TAMnext 10 yrs from global expansion

'17-'27 CAGRGlobal TAM = 5.7%


But China’s Faster Economic Growth Gives BABA a Larger Long-term Opportunity

We See AMZN Investing in New Int’l Markets to Continue Expanding its TAM to $17tn…

…as BABA Will Likely Focus More on China’s $14tn Offline/Online (New Retail) Opportunity

• We see BABA’s China Addressable Spend adding ~5X More than AMZN’s US Addressable Opportunity as BABA’s China TAM will be Almost as Large as AMZN’s Total Global TAM by 2027

Core/New Categories: US; Global Core: Western Europe and Japan

Global Expansion: India, ASEAN, Austrlia, Latin America


52%

50%

40%

35%

26%

24%

23%

0% 10% 20% 30% 40% 50% 60%

3Q:18

3Q:17

4Q:16

1Q:16

4Q:15

1Q:15

4Q:14

% U.S. HH's That Have a Prime Membership

Sources: Company Data, Morgan Stanley Research. AlphaWise

Meaning Amazon Could Be More Dependent on Emerging Markets than BABA

…as AMZN’s Long-term Topline Is ~2-3X More Dependent on Emerging Markets than BABAs

Our AlphaWise Data Shows US Prime Growth Is Slowing…

40%38% 37% 37%

38% 39% 40% 41%

9% 9% 9% 9%

13%15%

18%20%

10% 9% 9% 9% 9% 9% 9% 10%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024%

of

Mar

ketp

lace

Re

ven

ue

AMZN Int'l AMZN Int'l (ex- UK, Germany, Japan) BABA Int'l

74 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2018 Sources: BEA PCE, Company Data, Morgan Stanley Research

As Emerging Markets Could Add ~$4.9tn of Retail Spend by 2027

India

$1.6tn

Japan

$1.4tn

ASEAN

$980bn

Australia

$290bn

LatAm

$2.0tn

We See AMZN Expanding Its Ecosystem Globally… as BABA Strategically Partners and Acquires International Marketplaces/Payments Platforms

Acquisitions /

Investments

Western Europe

$2.8tn

US

$3.3tn

China

$11.4tn

$ = 2027 Retail

Spend Estimates

Korea

$400bn

AMZN vs. WMT – Who Will Prevail in India?


North America


+1 212 761 3365

Simeon Gutman [email protected]

+1 (212) 761-3920







Source: IAMAI, Morgan Stanley Research

Please note that F2027 represents calendar year C2026 ending December 2026 and so on for the previous years;

For F2017 online retail market size is based on Morgan Stanley Research estimates and is an approximate figure.

India: First, at High Level, eCommerce Set to Grow Over 10x by 2027

680

1,617

15

200

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

2017 2027

in b

illio

ns

Retail eCommerce

2.2% penetration

12.4% penetration

Retail CAGR: 9.0%

eCommerce CAGR: 29.7%

77 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2018 Sources: Economic Times. Company Data, Morgan Stanley Research

AMZN Focused on India Directly…BABA Indirectly Through Paytm…

VS

• Estimated ~$8bn GMV FY18

• Dedicated over $7bn of investment

• Prime/Prime Now 2-hr delivery

• Prime Video + local content

• Amazon Pay with UPI function

• Partnering with thousands of offline stores

• 200+ FC across 10+ states

• Alexa/Echo devices available

BABA holds a majority stake

Strategic Support

• Alibaba.com to support with import/export

• Alipay to support digital payments

• AliCloud to help with compute and data

• Alibaba largest shareholder of Paytm’s parent One97

eCommerce platform & payment service provider

• Serves ~700 towns across India

• Partnered with 75,000 stores

• Integration with BABA’s investees • BigBasket (online grocer)

• XpressBees (logistics)

• Zomato (restaurant discovery & food delivery)

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjT8__O4rbVAhXCXD4KHQUgBNkQjRwIBw&url=http://www.droidforums.net/threads/amazon-now-limits-prime-sharing-benefits-to-one-other-user.283513/&psig=AFQjCNG48O2YZTHk2RKw65lYVwKwLPkZXQ&ust=1501701944617412

78 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2018 Sources: Economic Times. Company Data, Morgan Stanley Research

India Is a Three Horse Race…

79 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2018 Sources: India Ministry of Corporate Affairs, livemint, Morgan Stanley Research Estimates

As Amazon and Flipkart Battle for Early Leadership

0.5

2.12.9

5.1

8.0

10.6

14.4

0.7

2.4

4.04.9

7.5

10.1

13.7

$0

$2

$4

$6

$8

$10

$12

$14

$16

Mar '14 Mar '15 Mar '16 Mar '17 Mar '18E Mar '19E Mar '20E

GM

V (

$ in

bn

)

AMZN India (est) Flipkart


But with Steep Investment Losses…

Sources: India Ministry of Corporate Affairs, livemint, Morgan Stanley Research Estimates

(4)(53)

(282)

(546)

(748)

(423)

(713)(684)

($800)

($700)

($600)

($500)

($400)

($300)

($200)

($100)

$0

Ma

r '1

3

Ma

r '1

4

Ma

r '1

5

Ma

r '1

6

Ma

r '1

7

Ma

r '1

8E

Ma

r '1

9E

EB

IT (

$ in

mn

)

AMZN India Flipkart

? ?


What are Amazon and Flipkart Spending On?

Sources: India Ministry of Corporate Affairs, livemint

153306

291

177

367126

811

609

$0

$200

$400

$600

$800

$1,000

$1,200

AMZN India Flipkart

Fisc

al 2

01

7 E

xpe

nse

s ($

in m

n)

Staff Costs Advertising & Promotion Transportation & Distribution

• Advertising and logistics/last mile • Discounting, discounting, discounting (AMZN reportedly discounting gold periodically)

2.1%

5.7%

0%

2%

4%

6%

8%

10%

Ad

vert

isin

g &

Pro

mo

tio

n C

osts

as %

GM

V

Advertising & Promotion Costs as % GMV

Amazon ex-India Amazon India


Amazon Lowering Take Rates in October

Sources: Company Website

Category Prior Oct 1st Delta

Apparel (excluding Innerwear and accessories) 17% 16% -1%

Apparel - sleepwear 13% 11% -2%

Wallets 12% 11% -1%

Home - Other Subcategories 17% 16% -1%

Accessories - Electronics, PCs and Wireless 17% 16% -1%

Referral Rate

• Amazon’s Non-FBA fees in India consist of a referral fee (the largest component), fixed closing fees, and shipping fees

• Amazon is lowering its referral rate in select categories for all sellers and lowering FBA fees starting October 1, 2018

83 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2018 Sources: comScore

Note: comScore had methodology changes in Dec 2017 and Apr 2018

Traffic Following as AMZN India Has ~50% Larger Audience…Though Flipkart Growing Faster

0

50

100

150

200

250

Fe

b-2

017

Ma

r-2

017

Ap

r-2

017

Ma

y-2

017

Ju

n-2

01

7

Ju

l-2

017

Au

g-2

01

7

Se

p-2

01

7

Oct-

20

17

No

v-2

017

De

c-2

01

7

Ja

n-2

01

8

Fe

b-2

018

Ma

r-2

018

Ap

r-2

018

Ma

y-2

018

Ju

n-2

01

8

Ju

l-2

018

In m

illio

ns

Total Unique Visitors

AMZN India Flipkart

On average, AMZN India has had ~50% more visitors per month over the last year

And Amazon Now Has As Many Monthly Visitors in India as it Does in the U.S.

• AMZN leading in traffic, though Flipkart has grown its users at an average of ~130% y/y over the past 6 months

• As of September 2018, AMZN has reported 150mn registered users in India

0

50

100

150

200

250

Feb

-2017

Ma

r-2

017

Ap

r-2

017

Ma

y-2

017

Ju

n-2

01

7

Ju

l-2

017

Aug-2

017

Se

p-2

01

7

Oct-

20

17

No

v-2

01

7

De

c-2

01

7

Ja

n-2

01

8

Fe

b-2

018

Ma

r-2

018

Ap

r-2

018

Ma

y-2

018

Ju

n-2

01

8

Jul-2

018

In m

illio

ns

Total Unique Visitors

AMZN U.S. AMZN India

84 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2018 Sources: mpwvl, CIA World Factbook

And on Logistics, AMZN Square Footage Growing…

125

15 13 6 4

0

20

40

60

80

100

120

140

UnitedStates

UnitedKingdom

Germany Japan India

Fulf

illm

en

t C

en

ter

Squ

are

Fe

et

(in

mn

) 38.2

23.0

15.6

4.9

0.30

5

10

15

20

25

30

35

40

45

UnitedStates

UnitedKingdom

Germany Japan India

Fulf

illm

en

t Sq

fe

et

pe

r 1

00

pe

op

le

Amazon now has 2/3 as much fulfillment capacity built in India as it does in Japan…

…Though Still Much Lower on Per-Capita Basis (Meaning There Is a Long Way to Go)


…Yet CapEx Is Relatively Low for AMZN India

Sources: India Ministry of Corporate Affairs

7 2581

449

894

1 5 15 21 50

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

Mar'12 Mar'13 Mar'14 Mar'15 Mar'16

$ in

mn

Total Operating Expenses CapEx

86 AMAZON DISRUPTION SYMPOSIUM | SEPTEMBER 2018 Sources: India Ministry of Corporate Affairs, livemint, Morgan Stanley Research Estimates

• India has been growing at a 56% CAGR (’14–’18) vs. North America at 24% and Total International at 16%

India Now Contributes ~7% of Total GMV Growth and ~25% of International GMV Growth

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2014 2015 2016 2017 2018E 2019E

GM

V (

$ in

bn

)

UK Germany Japan Italy India Other

4.4% 4.9% 7.0% 7.2%

28.8%

14.0%

22.3%

25.7%

0%

5%

10%

15%

20%

25%

30%

35%

2015 2016 2017 2018E

India's contribution to total GMV growth

India's contribution to international GMV growth


There Is More to Flipkart Than Its Core Dot Com Retail Offering

Sources: Walmart

• Flipkart is building an entire eco-system: Flipkart.com (general merchandise), Myntra/Jabong (fashion and apparel), PhonePe (payments platform), Ekart (logistics/supply chain)

Consumer

Find products

Pay for products

The Flipkart Ecosystem… …in action

Products are delivered


Myntra/Jabong

• The early online leader in apparel, a fast growing category with attractive margins • Currently ~$1.2b in GMV growing at ~50% (~1.2% market share) vs. the ~$100b fashion/lifestyle

industry growing at ~8-10%

• However, apparel is a key focus for Amazon and there is cannibalization risk as Flipkart.com also sells apparel

Source: Company data


PhonePe

• Mobile-phone payment system that operates on the United Payments Interface (UPI) platform

• Enables transactions on the Flipkart network and strengthens the relationship with consumers. Also open source to other vendors

• Strong market position and increasing transaction volume relative to PayTM (backed by BABA). However, competition is ramping up as Amazon (Amazon Pay), Google (Tez), and Facebook (WhatsApp) have all entered the space

Source: Livemint, Economic Times, Company data

0

50

100

150

200

250

300

February June July

UP

I Tr

ansa

ctio

ns

(Mill

ion

s)

PhonePe PayTm UPI


Website Comparison

• Relatively comparable prices. A basket of 10 goods was ~1.5% cheaper on Flipkart

• More engagement on Flipkart? Though number of reviews were similar, on comparable items we tracked, there were 70% more ratings on FlipKart on average

Source: Company websites


Flipkart Key Statistics

Source: Company website, Morgan Stanley Research

100mn Registered

users 10mn Daily page

visits

80mn Products

(across 80+ categories)

100,000 Sellers

8mn Shipments per month 21 Warehouses


Flipkart History: Key Milestones

Source: Quartz India, Company website, Morgan Stanley Research

07 16 08 09 10 11 12 13 14 15 17 18

$1 million

(Accel

Partners)

Funding

Operational

Founded

(selling

books)

$10 million

(Tiger Global)

$20 million

(Tiger Global)

$255 million

(Various

existing/new

investors)

$360 million

(Various

existing/new

investors)

$1.9 billion

(Various

existing/new

investors)

$700 million

(Tiger Global,

QIA)

~$4 billion

(Tencent,

Microsoft,

eBay,

SoftBank)

~$16 billion

(Walmart

acquires up to

77%)

Launched

Music, Movies

and Mobiles;

Cash on

Delivery

Card on

Delivery;

Dedicated

Logistics for

Faster

Delivery

Launched

Lifestyle and

Fashion;

Same Day

Shipping

Guarantee

Acquires

online fashion

retailers

Myntra for

~$300m

Through

Myntra,

acquires

Jabong for

~$70m;

acquires

mobile

payments

company

PhonePe

Advertising: How Does Amazon Advertising Fit and Who

Loses Share?


North America


+1 212 761 3365







Amazon Advertising Cometh…

Amazon Sponsored Product Ad Units Amazon Advertising on Kindle Devices

Sources: Company Data and Website, Morgan Stanley Research


…With Sponsored Product Ads, Amazon Predominantly Tapping into Trade Spend – a ~$180B Market Just in the US

Source: Company data, Morgan Stanley Research, Euromonitor, Nielsen, Cadent, CapGemini, Cognizant, Eversight, POI and GartnerNote: Listed companies in Appendix plus Private Label estimated at 53.5% of Nielsen tracked retail sales

($mn) Total Promo Trade

Trade Spend Analysis (US) Sales % net sales Adjustment Spend

Bottom Up: ~40 CPG Companies (100s of Brands) 303,526 33% 53% 187,230

(CPG Company Net Sales x Promo % / Long-Tail and Private Company Gross Up 53%)

Top Down: 9 CPG Categories (ex-Tobacco) 887,745 7% 30% 201,875

(Retailer POS from Euromonitor x Vendor Allownace % net sales / 30% gross up)

Avg. of 4 Third-party Total CPG Est. 946,429 18.0% 170,313

Total Trade Promotion Spend 178,393

Consumer: Promotional Allowances 70% 124,875

Retailer: Vendor Allowances 30% 53,518

TAM: Trade Spend to Search/eComm Advertising 53,518

180bn

55bn

2.2bn

Total US CPGTrade Promotion Spend (2017E)

Addressable Trade Spendto Shift to Online Advertising

AMZN Sponsored Listing (Search) Revenue


0.6 1.6 3.1 4.37.2

10.514.7

1.93.1

4.5

6.8

10.1

13.1

15.5

0.9

1.2

2.1

3.3

7.5

10.4

13.3

$0.0

$3.4

$5.9

$9.6

$14.4

$24.7

$34.0

$43.5

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

2013 2014 2015 2016 2017 2018E 2019E 2020E

AM

ZN

EB

IT b

y S

eg

men

t ($

B)

AWS

Subscriptions

Other (Advertising, CC)

How Big Could the Advertising Business Become?

Source: Magna Global, IAB, Company data, Morgan Stanley Research

Advertising is a Growing High Margin Revenue Stream for AMZN

We See Amazon’s Share of US Advertising Continuing to Grow to MSD%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 2018 2019 2020

% o

f U

S O

nli

ne A

d M

ark

et

Google Search Facebook YouTube Amazon Twitter Snap Other

GoogleSearch

Facebook

YouTube

Amazon

TwitterSnap

Other Online

’17-’20 CAGR

Advertising: 60%

Surviving in an Amazon World M O R G A N S T A N L E Y R E S E A R C H

North America


+1 212 761 3365

Kimberly Greenberger [email protected]

+1 212 761 6284

Simeon Gutman [email protected]

+1 (212) 761 3920

Lauren Cassel [email protected]

+1 (212) 761 4143

David Gardner [email protected]

+442074255829







Which Companies Are Surviving/Thriving?

Industry/Business


Regulatory Hurdles



B R I A N


Search & Travel

US

In

tern

et

Fas

hio

n

Ha

rdli

ne/

Bro

ad

lin

e


SMID Internet

European Fashion Branded Footwear

Classifieds

Softlines/Dept Stores

Oth

er

Online Grocery

Hardline/Broadline Retail

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjrzZj0s5jWAhUK_4MKHU7FDmgQjRwIBw&url=https://en.wikipedia.org/wiki/File:Expedia_logo.svg&psig=AFQjCNE3jph4S3OWZYXvOno0FCbV5wBmgg&ust=1505056869375421



http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiN8Oecu6XWAhUl6YMKHTtqDvoQjRwIBw&url=http://www.supervalu.com/misc/for-the-media/logos-image-library.html&psig=AFQjCNHBTfQ0lgFSzO3viiSMVnDGQNZl8Q&ust=1505505417422059

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiN8Oecu6XWAhUl6YMKHTtqDvoQjRwIBw&url=http://www.supervalu.com/misc/for-the-media/logos-image-library.html&psig=AFQjCNHBTfQ0lgFSzO3viiSMVnDGQNZl8Q&ust=1505505417422059

http://corporate.walmart.com/



As an Amazon “Scarcity Value” Is Emerging

Sources: Thomson Reuters, Morgan Stanley Research

YTD Multiple Expansion

6.8x

11.8x

4.4x

8.6x

1.1x 1.8x

12.2x

19.0x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

20.0x

1/5/18 2/5/18 3/5/18 4/5/18 5/5/18 6/5/18 7/5/18 8/5/18 9/5/18

NT

M E

V/S

ale

s

GRUB ETSY W SQ

+56%

+74%

+95%

+53%


Costco: A Focus on Value and the Treasure Hunt


US Traffic Growth Membership Growth US Retention

F’2018 YTD 5.1% 1.5% 90.1%

F’2016 3.4% 0.8% 90.2%

F’2016 3.0% 2.5% 90.4%

F’2015 4.3% 3.4% 90.7%

F’2014 4.3% 2.0% 90.5%

F’2013 4.5% 1.3% 89.9%

Average 4.1% 1.9% 90.3%


A Focus on Value and/or the Treasure Hunt: Off-Price Retailers Differentiated from AMZN

1. Low National Brand ASP Limits Coverage Of

Variable eCommerce Costs

2. No Advertising Policy - Brands Restrict

Advertising of Discounted Prices (incl. online)

3. Protecting Brands - Store-Based Retailing Limits

Visibility of Price Discounting

4. In-Store Shopping > Convenient Than Online

Given Wide Consideration Set

5. EDLP = Compelling Value


$14-$15

Off-Price ASP

$12-$13

$11-$12

$10

$8


Fashion Matters… Addressing the 3 Key Barriers to Shopping Online

Sources: UK Apparel Retail – 10 Key Findings from our 2018 Consumer Survey (AlphaWise, July 2018)

Notes: Ninth annual AlphaWise survey of the UK Apparel Retail market. We asked 1,000 customers for their views on the leading

UK clothing retailers.

Product fit and browsing experience a key barrier to online shopping.

1) Improving returns proposition/try before you pay

2) Focus on the browsing experience

3) Shortening delivery times, improving convenience

ZALANDO


Skate to Where the Puck Is Going… Embracing Amazon’s Distribution Opportunity


• NKE announced it would sell directly to

Amazon in June 2017

• Better control over 3P sellers and

unlicensed distributors = brand

protection

• Gives NKE the opportunity to elevate

how the brand is presented and sold

on Amazon

• Nike.com vs. Amazon’s Nike “Best

Sellers” pages reveal very different

products = allows Nike.com to retain

premium brand positioning

• This poses a greater risk to

department stores and other mid- to

low-end footwear retailers than the

brands themselves


Tough Business Models…with Strong Customer Experiences


During our TMT conference in Barcelona, last year we asked investors:

What is your biggest concern for Ocado shares?

0%

20%

30%

40%

10%

Rapid maturation of the UK online grocery market

Competitive pressures in the grocery market

Amazon

Inability to sign meaningful partners on its Smart Platform

My biggest concern is elsewhere


Wayfair Going Toe to Toe with Amazon


…vs. delivery in 2+ weeks Delivery in 4 days…


If You Can’t Beat Them…


Physical Assets

eCommerce

Combined omni-

channel experience

• Approximately 4,800 US stores (~3,600 supercenters)

• 157 total distribution centers (F’18)

• 30 dedicated eCommerce fulfillment centers (F’18)

• Walmart.com flagship website (>75m SKUs)

• Operates jet.com, hayneedle.com, shoes.com, moosejaw.com, modcloth.com and

bonobos.com

• Brand partnerships including Lord & Taylor store on walmart.com

• Click and collect in >1,800 stores already (targeting 2,000 by year end)

• Grocery delivery available to 40% of US population by year end

• Pickup towers, 5% BOPIS discount, 30 second returns in stores, free 2 day

shipping on millions of items for orders >$35, etc.




Prioritizing stores over dedicated DCs… …and focusing on better merchandising

• Focused on ship from store vs. building a network

of DCs – a different strategy to other retailers

• Q1’18 earnings call: “…the team is testing and rolling out

cutting-edge automation that will allow our DC teams to customize

and sort each shipment to match the needs of an individual store,

reducing store labor without creating the need to invest in new

square footage in our upstream facilities”

• Acquired Shipt, a membership-based same day

delivery service, for $550m in 2017

• Remodeling ~1,000 stores over three years

• Refreshed merchandising in key categories like

apparel and home furnishings

• Launching more exclusive brands (35 today)

• Brand partnerships with popular influencers – e.g.

Hearth & Hand with Magnolia (Chip & Joanna

Gaines, Fixer Upper TV stars)




Key BBY Advantages Focus on Service and ‘Experiential’ Retail

• Price match guarantee

• High quality service – “Apple store-esque”

• Product knowledge/expertise – one of few places

for customers to try and learn about new tech

• Convenience

• Availability

• Customer loyalty (good relationships – Geek

Squad, In Home Advisor etc.)

• Vendor relations – manufacturers invest alongside

BBY in building store experience (inc. AMZN)

Amazon Apple

Samsung Sony

Where Should Amazon Be Investing More?

Autonomous, Video Games, Financials, Travel…and

Space?


North America


+1 212 761 3365

Adam Jonas [email protected]

+1 (212) 761 1726

Betsy Graseck [email protected]

+1 (212) 761 8473







Autonomous Driving: Should Amazon Become a Competitor to Waymo?


AMZN Has Been Steadily Building Out a Logistics Network the Past Few Years…

Source: NBC News, Company data

Date Announcement

Mar 2015 Amazon launches Prime Now last-mile delivery in multiple U.S. cities

Jul 2015 Amazon launches Prime Now last-mile delivery in London

Sep 2015 Amazon launches Amazon Flex

Dec 2015 Acquired thousands of truck trailers/hundreds of trucks

Aug 2016 Leased 40 B767 air freighters with the option to pick up equity stakes air lessors

Dec 2016 Building in-house freight mgmt tech platform/app

Jan 2017 Acquired ocean freight forwarding license

Jan 2017 Building $1.5B Kentucky air hub to house its aircraft

Nov 2017 Releases Amazon Relay so truck drivers can more easily access fulfillment and sort centers

Apr 2018 Amazon starts delivering to your car

Jun 2018 Amazon effectively launches a 3P delivery fleet


…but Has Been Muted on Autonomous Driving

Source: NBC News, Company data

Date Event

Apr-17 Formed ~12 person team to think about implementing self-driving cars

Jan-18 Amazon and Toyota announce self-driving food delivery concept car

Jan-18Amazon files patent for autonomous ground vehicle to pick up packages from a delivery truck and

bring it back to your house


And This Is a Potential Risk as Waymo Is Leading…and It Could Help Retailers Better Compete with Amazon

Source: Company data, Morgan Stanley Research

• Waymo Has Now Driven 9mn Miles on Public Roads, and Their Pace of Testing Has Been Accelerating

1,000

2,000

3,000

4,000

5,000

8,000

9,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000Jun

2015

Oct 201

6

Ma

y 2

017

Nov 2

017

Fe

b 2

018

Jul 2018

Au

g 2

018

Mile

s (

in t

housands)

Waymo Miles on Public Roads


As an Integration of Google Shopping + Waymo Could Help Level the Shipping Playing Field

Source: Company data, Morgan Stanley Research

Waymo Partners with Retailers to Deliver Products to Customers

Search Buy Supply Logistics End Consumer

Product Discovery Online Shoppers Retailers & Warehouses Waymo Vehicles Online Shopper at Home

Users search for products on

Google

Goods are ordered online

by retail customers

Retailers and eCommerce companies

hold inventory

in stores and warehouses

Waymo delivers the item to

customer in 2 hours or less

Retail customers receive their orders

from automated Waymo delivery

vehicles

• Waymo + Retailers Store/Warehouse Inventory Could Create a Prime Now Equivalent to Better Compete with Amazon Logistics


The Upfront Costs for AMZN to Develop Autonomous Driving Technology Could Be Only ~$2-$3bn, or ~1.5% Additional OpEx…

Source: Forbes/Tim Kentley-Klay, Co-Founder and Former CEO of Zoox, and Morgan Stanley Research

Waymo, Uber, and GM’s Cruise have each spent only $2-$3bn cumulatively over the past 5-9 years…

…If Amazon spent $3bn in one year, it would represent only ~1.5% extra retail OpEx

$3.0

$2.0$1.8

$0.3

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

Waymo Uber CruiseAutomation

Zoox

$ in

billio

ns

200

3.0

$0

$50

$100

$150

$200

$250

2018E

$ in

billio

ns

Total OpEx ex-AWS Self-Driving Spend


… And Investing in Autonomous Driving Could Yield ~5-15% Increases in Gross Profit via Reduced Shipping Costs


Shipping is Amazon’s Second Greatest Expense After Fulfillment…

…and We Estimate Autonomous Driving Will Cause 30-50% Savings in Long Haul Transportation

11% 13%

10%10%

4%

5%3%

3%1%

1%

0%

5%

10%

15%

20%

25%

30%

35%

2017 2018E

Op

Ex

as

% o

f G

MV

Fulfillment Shipping Marketing Tech & Content (ex-AWS) G&A

% Reduction in

Shipping Cost

Shipping Cost

Per Unit

Estimated

Savings Flow-

Through

Gross Profit (in bn)Gross Profit %

Increase

0% $4.55 $219 0%

10% $4.09 75% $225 3%

20% $3.64 75% $230 5%

30% $3.18 75% $236 8%

40% $2.73 75% $242 10%

50% $2.27 75% $247 13%


Why Amazon Has a Vested Interest in Auto 2.0


Customer Order

Smartphone, Computer, etc.

Processes Order

Organizes Logistics

Transportation

Warehouses

Transmission

Final Delivery

To Car, Home, etc.

AMZN / GM

Delivery Loop

The Amazon/OEM Delivery Loop

Source: Shutterstock, Morgan Stanley Research


How Does Amazon Save Money?


Standard Neighborhood

with homes/mailboxes/people that can receive deliveries

Miles Traveled: ~6

Time: 50 homes in 3 hours

Cost: $150

Miles Traveled: <1

Time: 50 vehicles in 45 minutes

Cost: $30

P

Parking Lot

where commuters leave vehicles that can receive deliveries

vs.

Estimated Savings

2 Hours and 15 Minutes / $120


Value Proposition of a GM and Amazon Partnership


Common Goal

Fulfillment/Logistics/Transport

Auto OEM

100mm vehicles

Internet Retailer

100mm Prime members

In-Vehicle Storage/ Warehousing

Customer Engagement

Last Mile Delivery

Edge Computing Mapping/Logistics

Digital Content Delivery


Delivery/Fulfillment Availability in the Global Fleet


3,500+ Empire State Buildings

= x 120ft³

1.2Bn Cars Globally


Amazon's Patent: UAV Docking Connector and Vehicle Docking Mechanism

Source: US Patent and Trademark Office


Video Games: Could Amazon Become the Subscription or Streaming Leader?


The Consumer Trends Are Undeniable…Gaming Is on the Rise

Sources: Bureau of Labor Statistics, Morgan Stanley Research

0

5

10

15

20

25

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Min

ute

s Sp

en

t p

er

Day

(A

me

rica

ns

+15

Ye

ars

Old

)

Reading

Playing Sports

Playing Games

Social Events

Sporting Events


AMZN Gaming: Twitch Has Been a Success…but Other Than That It’s Full of Fits & Starts


2014 2015 2016 2017 2018

Amazon acquires studio Double Helix Games (Feb '14)

Amazon acquires game livestreaming service Twitch (Aug '14)

Amazon launches Lumberyardgame development tool (Feb '16)

Amazon acquires online game portal Curse (Aug '16)

Amazon announces 3 games: Crucible, New World, and Breakaway (Sep '16)

Amazon acquires game "backend as a service" company GameSparks (Mar '18)

Amazon cancels developmentof Breakaway (Mar '18)


Because over Time We See a Subscription Opportunity (Will It Be Prime?)

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Global Video Game Gross Profit (ex-Mobile, $mn)

Cloud, Subscription, & Multiplayer Services

In-Game Spending

Hardware & Game Sales

Sources: IDC, Morgan Stanley Research

A ~$7bn Gross Profit Pool Growing at a 19% ’17-’25 CAGR


As Well as a Cloud Computing Opportunity (Will It Be AWS?)


Old Delivery

Publisher Console Platform Consumer

New Delivery

Cloud Gaming Service Cloud ISP Platform Consumer

Computing and rendering

game instead of console

Providing bandwidth for

HD video streaming

Replacing console as

hardware that delivers game


Space


How the Rise of AMZN Stock Accelerates the Space Economy


Financial Strength The Will

What’s in it for AMZN? Catalysts

• Jeff Bezos personally funds $1bn/year toward Blue Origin

• Blue Origin founded in 2000 (SpaceX founded in May 2002)

• Bezos sees legacy defined by his space exploration efforts

• NASA to conduct 7 missions on Blue Origin’s new Sheppard Spaceship

• NASA announces crews for manned flights to ISS on US rockets

• US Space Force becomes 6th Branch of US Armed Forces

• Increased global internet connectivity leads to higher eCommerce adoption, moving more customers to AMZN’s ecosystem

• Redundant, resilient, cyber secure broadband network helps insure the robustness of AMZN’s ecosystem

• Jeff Bezos’s net worth of $160bn is equal to 1% of United States GDP

• Equal to 16 years of NASA’s budget for space exploration


Global Space Economy $350bn - $1.1tn

Source: Morgan Stanley Research

$1.75

$1.10

$0.35

$0.62

$0.0t

$0.5t

$1.0t

$1.5t

$2.0t

2015

2016

2017e

2018e

2019e

2020e

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

2029e

2030e

2031e

2032e

2033e

2034e

2035e

2036e

2037e

2038e

2039e

2040e

Global Space Economy ($t)

Bull Case Global Space Economy Bear Case


Should Amazon Launch a Debit Card?


Amazon Relaunched Its Cobrand Chase Visa Credit Card in Jan 2017…

Sources: Morgan Stanley Research, Company Website

• Amazon launched a cobrand credit card with JPM in 2002, before launching an Amazon-only store card with SYF (GECC) in 2007. SYF relaunched the Amazon Prime Store Card in 2015, this time with 5% cash back, and JPM relaunched the Amazon Prime Rewards Visa card in Jan 2017, also now with 5% cash back (from 3%).

• Benefits of Amazon Prime Store Card (SYF):

o 5% Back at Amazon

o Special financing/no interest offers

o 6 months on purchases of $149+

o 12 months on purchases of $599+

o 24-months on select Amazon-sold items

o No annual fee

Synchrony Store Card Chase Prime Visa Card

• Benefits of Amazon Prime Rewards Visa Card (JPM):

o 5% Back at Amazon, Whole Foods

o 2% back at restaurants, gas station, drugstores

o 1% back on all other purchases

o No annual fee, no FX fees


…And Now Has Leading US Penetration Amongst Major Retailers

Sources: Morgan Stanley Research, AlphaWise

• Our AlphaWise surveys indicate Amazon-branded credit cards now have higher penetration in the U.S. than other major broadline retailers or even Macy’s

• Amazon now has 26% penetration, up from 18% last year

18%

26%

0%

5%

10%

15%

20%

25%

30%

Q3:17 Q3:18

% o

f U

.S.

Resp

on

den

ts

Do you currently own an Amazon Prime credit card?

18%

26%

11%

15%15%17%

11%

22%

0%

5%

10%

15%

20%

25%

30%

Q3:17 Q3:18

% o

f U

.S.

Resp

on

den

ts

Do you currently own any of the following store brand credit cards?

Amazon Card Macy's Store CardTarget Store Card Walmart Store Card

Note: Amazon Card includes both the Amazon Prime Store Card and the Amazon Prime

Rewards Visa Card


… And Cards Are Becoming an Increasing Driver of Amazon’s Prime Growth


• 12% of Prime members indicated that Amazon-branded credit cards were the main reason they signed up for Amazon Prime – up from 4% in 3Q17

4%

12%

0%

2%

4%

6%

8%

10%

12%

14%

3Q:17 3Q:18

Amazon credit cards as main reason for having Amazon Prime?


…as the Power of JPM’s National Brand Is Helping Drive Up Prime Penetration


• Since the relaunch of JPM’s Amazon card last year, Amazon’s share of higher income households has increased significantly, from 59% to 72%

• We believe JPM’s strong, nationally recognized brand and marketing power is a contributing factor alongside Amazon’s relentless focus on the customer (prime now expansion, prime now whole foods launch and expansion, etc)

28%

39%

58% 59%

32%39%

59%

72%

0%

10%

20%

30%

40%

50%

60%

70%

80%

<$20K $20-$49K $50-$99K $100K+% o

f U

.S.

Pri

me M

em

bers

U.S. Prime Penetration by Household Income

3Q:17 3Q:18


28%

39%

58% 59%

32%39%

59%

72%

0%

10%

20%

30%

40%

50%

60%

70%

80%

<$20K $20-$49K $50-$99K $100K+% o

f U

.S.

Pri

me M

em

bers

U.S. Prime Penetration by Household Income

3Q:17 3Q:18

Could a Debit Card Jumpstart Amazon’s Penetration of Middle Income?



What Does Middle America Want in a Payment Service?


Debit Keeps customers from over-drafting

Convenience e.g. digital mobile app

Value If you can deliver rewards/services, provides a differentiated experience


Why Would Amazon Want the Middle Income Consumer?

Sources: Morgan Stanley Research, US Bureau of Labor Statistics

• A sizeable portion of consumer spending comes from households making less than $50K per year (28%)

• Includes recent high school and college graduates

• Also includes immigrants or expats with a lack of credit history in the US

<$50K28%

$50-100K 28%

$100K+ 44%

Annual Household Expenditures by Income, % of Total


Travel: Should Amazon Enter Into Travel?


Travel: Alexa, Let’s Book a Vacation


Alexa, let’s book

a vacation


Large TAM ($480bn TAM) and Important Consumer Data Set

Source: BEA, PCE, Morgan Stanley Research, Company Data

2,674

481

3,155

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Core Retail Spend Travel Opportunity Total Addressable Market

AM

ZN

's U

S A

dd

res

sa

ble

Mark

et

($ b

n)


Leverage Ecosystem and Customer Efficiency: AMZN spends ~$0.75 in Advertising/Transaction...vs $16 for BKNG/EXPE

Source: Company data, Morgan Stanley Research Note: 1) Assume 2 items per package; 2) Assume 70% of Sales and Marketing is advertising

GP/Transaction Direct Ad/

Transaction

Net Contribution/

Transaction

Net Contribution

Margin/

Transaction

Online Travel

EXPE $36.17 $18.97 $17.20 48%

BKNG $33.54 $12.23 $21.31 64%

Online Travel Median $34.86 $15.60 $19.26 56%

eCommerce

EBAY1 $6.62 $1.16 $5.46 82%

GRUB2 $3.41 $0.87 $2.54 74%

AMZN1 $9.48 $0.74 $8.74 92%

eCommerce Median $6.62 $0.87 $5.46 82%


What if AMZN Travel Was Half the Size of EXPE's Global Hotel Business?

Source: Company data, Morgan Stanley Research Note: 1) Assume AMZN generates ~80mn hotel transactions, or 50% of EXPE's 2017 global hotel transactions; 2) Assume $600mn of supply organization and $300mn of G&A investments

EXPE

Net Contribution (in millions)1,2

GP/Transaction

$26 $28 $31 $34 $36

EXPE

Dir

ect

Ad

/Tra

nsacti

on

$19 ($364) ($162) $39 $241 $443

$15 ($91) $111 $313 $514 $716

BKNG $12 $182 $384 $586 $787 $989

$8 $456 $657 $859 $1,061 $1,262

$5 $729 $930 $1,132 $1,334 $1,535

Amazon Healthcare: Where Are We Now and What

Happens Next?


North America


+1 212 761 3365

Ricky Goldwasser [email protected]

+1 212 761 4097

David Risinger [email protected]

+1 212 761 6494

Amazon Disruption


We Have Written About the Large Healthcare TAM to Build Upon Core Retail

Note: excludes specialty pharmaceutical spend Source: BEA, PCE, Morgan Stanley Research, Company Data

Healthcare Expands Amazon’s Existing TAM By 16%/18% in Terms of Revenue and Gross Profit

2,674

421

843

153

3,517

575

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

Core Retail Spend Healthcare Opportunity

AM

ZN

's U

S A

dd

ress

ab

le M

ark

et

($b

n)

Revenue Gross Profit


Most Bullish About B2B Supply (Most Natural Extension)…


Hospitals, IDNs, etc

Distributors

Flow of dollars

Medical Devices

GPOs

Flow of devices

Device manufacturers pay GPOs an administrative fee on

volume purchased by the member hospital through GPO

GPOs provide member hospitals with a rebate from

purchase volume

Hospitals purchase products directly from manufacturers

Distributors purchase products from manufacturers

Hospitals purchase products via a distributor


…and Pharmacy (The 1-2 Hour Pharmacy)


What Could the Amazon Pharmacy Look Like? We Offer A Blueprint for an AMZN Hybrid Pharmacy

Traditional Model Hybrid Model Traditional Model

RETAIL PHARMACY PHARMACY DELIVERY MAIL ORDER / SPECIALTY

Brick & Mortar Tech + Logistics Central Facility + Shipped

Quick Scorecard

Market Share: 80% Market Share: <1% Market Share % 11%

Sales Productivity: $$ Sales Productivity: $$ Sales Productivity: $$$$$

Operating Costs $$$$ Operating Costs $ Operating Costs $$

Investment $$$ Investment $$ Investment $$$$$

Barriers: LOW Barriers: MEDIUM Barriers: HIGH

Tech Needed: LOW Tech Needed: HIGH Tech Needed: HIGH

Amazon's Combined Approach to Pharmacy


What’s Changed…Well, It Looks Like AMZN’s Healthcare Focus Has Increased

Date Announcement

Jan 2018 Amazon-JPM-Berkshire Hathaway announce JV to tackle rising costs

Feb 2018 Amazon launches an OTC medicine private label brand, Basic Care

June 2018 Amazon acquires online pharmacy, PillPack

July 2018 Amazon reportedly in talks with startup Xealth and a few hospital

networks to allow doctors to pre-fill a basket of OTC medical supplies for

patients upon discharge

July 2018 Amazon posts job posting for someone to lead outreach to medical-

products manufacturers and service providers

July 2018 Amazon reported to be in discussions to acquire India-based MedPlus,

an omni-channel pharmacy with ~1,400 physical locations in India

Sep 2018 Amazon B2B sales now at $10bn run rate vs. $1bn run rate in 2016


What Is PillPack?

Source: Company Website, Morgan Stanley Research

• Online pharmacy with no extra charge to consumers

• Digital licenses in 49 states with a facility in New Hampshire where they pick/pack orders

• Established relationships with PBM Networks covering ~90% of Americans

• ~$100mn of revenue in 2017

• PillPack handles doctor and insurance relationships

Patient fills script and pays typical copay

1

PillPack acts as digital pharmacy

2

PillPack delivers monthly prescriptions and over-the-counter

(OTC) meds

3

Key “shoehorn” to Amazon’s growing relationships in healthcare industry

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjvmPq5vLLXAhWIrVQKHZczDQAQjRwIBw&url=https://www.vexels.com/png-svg/preview/134775/sick-emoji-emoticon&psig=AOvVaw02oR7pGZObXcZtBF89e183&ust=1510350505914275

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiNrJ3MkqDWAhUD64MKHbuaDZIQjRwIBw&url=https://www.dreamstime.com/royalty-free-stock-images-delivery-truck-road-d-illustration-yellow-asphalt-over-white-background-image30367089&psig=AFQjCNHQG0c7ImS6yiWRp_PFo7qO5ht2lg&ust=1505322642129088


Why Did AMZN Acquire PillPack? – 1) TAM Expansion

Note: excludes specialty pharmaceutical spend Source: BEA, PCE, Company Data, Morgan Stanley Research

• Healthcare Expands Amazon’s core US Retail TAM By 16%/18% (Revenue/Gross Profit)

2,674

$843

$204

$45

$218

$108

$3,095

$996

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Revenue Gross Profit

AM

ZN

's U

S A

dd

ress

ab

le M

ark

et

($b

n)

Core Retail Spend Prescription Drug Spend Other Healthcare Spend


52%

50%

40%

35%

26%

24%

23%

0% 10% 20% 30% 40% 50% 60%

3Q:18

3Q:17

4Q:16

1Q:16

4Q:15

1Q:15

4Q:14

% U.S. HH's That Have a Prime Membership

Why Did AMZN Acquire PillPack? – 2) Prime Penetration Driver

Source: AlphaWise, Morgan Stanley Research

Pharma Addresses the 55+ Age Demographic…Which has Lowest Prime Penetration

…And Our AlphaWise Data Show US Prime Growth Is Slowing

Note: AlphaWise survey as of 3Q:17


Why Did AMZN Acquire PillPack? – 3) Could Help Scale Prime Now (Drive Order Frequency)…

Source: Morgan Stanley Research, Company Data Assumptions: $18 wage/hr, 12.5 mins pick & pack, 3 deliveries/hr, $100 overhead/day, $3 gas per gallon, 3 miles per delivery, 15mpg, trucks used 8 hour of 12 hour delivery day

• The average American 65 or older has ~37 prescriptions/year

~$4.25 ~$9.50

$22


Amazon Launched its OTC Private Label Brand, basic care, in February 2018



Amazon Opportunity More Hype than Incremental Sales for Perrigo (PRGO)


• Perrigo is the leading OTC product private label manufacturer

• It has maintained ~65-70% share of US private label OTC products for the past 20 years.

• Amazon basic care is leveraging Perrigo as a key supplier for OTC items.

• We do not expect much of an incremental sales opportunity because online purchases will likely

cannibalize Perrigo’s existing sales via traditional retailers.

• Examples include Walmart Equate and Walgreens store brand acetaminophen.

• US online sales currently represent a small fraction of total OTC sales but are set rise.

• According to Perrigo, online sales currently account for <2% of the total US OTC market.


Example of Perrigo GoodSense Products on Amazon.com


Perrigo GoodSense version of branded Zyrtec for allergies Perrigo GoodSense version of branded Prilosec for heartburn


The Next Move: The Three Phase Evolution of the Drug Supply Chain

Establish Relationship with Manufacturers • $44 billion profit opportunity (generic), $9

billion profit opportunity (branded)

• Low barriers to entry for generics; higher barriers to entry for branded but market is evolving which could make for an easier relationship over time

• Most at risk: Distributors, PBMs

Establish Back-end Infrastructure • Claims processing capabilities

• A potential fit with Amazon/Berkshire/JPM JV aiming to reduce administrative costs

• Most at risk: PBMs

Establish Infrastructure • $40 billion profit opportunity

Establish a pharmacy operation

Network arrangements with PBMs

Wholesale & Drug Retail License

• Create a preferred payer network

• Pharmacy at Wholefoods leveraging Prime Now

• Most at risk: Drug Retailers, Mail PBM Operations

Improve Consumer Experience

Opportunity to Lower

Consumers’ out of Pocket Spend

Phase 1

Phase 2

Phase 3


Next Catalysts

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwijj_Sa-KfWAhUc8YMKHQqRB-AQjRwIBw&url=http://www.mckesson.com/&psig=AFQjCNHjsgjpN5MSDQo2plyVwbgNXr8oSQ&ust=1505590521707875



https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiFvLbS-KfWAhUqw4MKHXBiAGMQjRwIBw&url=https://cvshealth.com/newsroom/media-gallery-and-corporate-logos/cvs-health-logos&psig=AFQjCNFzvTOgcYOwwaBGfAkrrziMu2e7xA&ust=1505590715919251


~$200B US Retail & Mail Pharmacy Spend (Gross)

Chronic (80% of spend) ~3,300M Adjusted Rx $160B Gross Spend

Breaking Down the Market: Retail vs. Mail

Source: Morgan Stanley Research, IMS Health

Acute (20% of spend) ~1,100M Adjusted Rx $40B Gross Spend

Mail ~600M Adjusted Rx $25B Gross Spend

Retail ~2,700M Adjusted Rx $135B Gross Spend

Note: Estimates exclude specialty spend.

(40% share)

(20% share)

(14% share)

(10% share)

(24% share)

(24% share)

(6% share)

(7% share)


~$210B Revenue across the US supply chain

Breaking Down the Market: Branded vs. Generic

Generic $70B Revenue

Traditional Branded $140B Revenue

Generic $44B Gross Profit

Traditional Branded $9B Gross Profit

Brands represent the largest spend

category

but generics are a larger profit

opportunity with lower barriers to

entry

Source: Morgan Stanley Research, IMS Health

Note: Estimates exclude specialty spend.


Pharmaceuticals: Generic Drug Profits – Everybody Wants Some

Reimburse for the majority of the cost of most drugs;

capture an opaque portion of generic economics

Manufacturer

PBMs

Buying Groups Three group represent 90% of US generics drug procurement

Manufacturers Would like an “alternate channel’ to reach customers and circumvent buying

groups. We are skeptical that Amazon will be a savior for generic manufacturers

Distributor Pharmacy Patient

PBMs

Buying Groups



Understanding Consumer Behaviors Is Key to Developing a Pharmacy Strategy

• Clinic • Hospital

• Physician

• Manufacturer • Drug Retail • Wholesaler

• Rx Scripts

• PBM/Specialty Pharmacy

Branded

Generic


http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=2ahUKEwi_ge3Dya3aAhUHT98KHU38C1AQjRx6BAgAEAU&url=http://www.clipartpanda.com/clipart_images/person-symbol-clip-art-4544934&psig=AOvVaw2M8EbjQQDcAKydarJ7Y8Tb&ust=1523376403492674

http://www.clipartpanda.com/clipart_images/bandaid-jpg-24630702

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=2ahUKEwi2qY6K4a3aAhVhnuAKHUslCO0QjRx6BAgAEAU&url=https://www.istockphoto.com/illustrations/hospital&psig=AOvVaw1jo9UL-BTKhsj8YSfP19XC&ust=1523382736769917

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=2ahUKEwjK67rn8K3aAhWBhOAKHankCkoQjRx6BAgAEAU&url=https://www.shareicon.net/doctor-health-medical-stethoscope-phonendoscope-healthcare-and-medical-847911&psig=AOvVaw1pT_vsNkTaOzOxJY7PnZtu&ust=1523386931765856

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=2ahUKEwiBhI6H8a3aAhXQVN8KHStmCioQjRx6BAgAEAU&url=https://www.onlinewebfonts.com/icon/493422&psig=AOvVaw22TCye6-KE7dIEmyBTJUiE&ust=1523386986455765

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=&url=https://www.allalliedhealthschools.com/&psig=AOvVaw3NyQ_Gb7-wqFlObROnKFRc&ust=1523981385233557

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=&url=https://www.allalliedhealthschools.com/&psig=AOvVaw3NyQ_Gb7-wqFlObROnKFRc&ust=1523981385233557


Building Blocks of A Pharmacy Strategy: Physical Locations That Offer Both Branded and Generic Drugs, Leveraging the Wholefoods Infrastructure

Source: Company Websites, Morgan Stanley Research

1

2

3

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiN4qacr8bXAhXD64MKHXZIAgIQjRwIBw&url=https://logos-download.com/121-whole-foods-market-logo-download.html&psig=AOvVaw2tJk9fCpF8YRVuqHJPi2_L&ust=1511034205570943

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwibps2mr8bXAhVF_IMKHapfAfQQjRwIBw&url=https://commons.wikimedia.org/wiki/File:Amazon_Prime_logo.png&psig=AOvVaw0WFYqev1ykw8m2ZpDEYcGV&ust=1511034228707677

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjL9uyyr8bXAhUI7YMKHexfDL8QjRwIBw&url=http://absolute-forum.com/hot-deals/71517-amazon-prime-now-coupon-10-off-20-more-free-2-hour-delivery.html&psig=AOvVaw03bDNS_SDUJS6RO165aZl4&ust=1511034253710898


Building Blocks of a Pharmacy Strategy: Pharmacist Consult

Telemedicine transports pharmacist into homes



Optum Rx 22%

CVS Caremark

30%

Express Scripts 23%

Others 25%

Building Blocks of a Pharmacy Strategy: A Preferred Payor Network

UnitedHealth with its scale, PBM asset, limited mail operations, retail ownership, and willingness to form preferred networks driven by consumer choice stands out as a potential partner for Amazon.

Medical

Lives*

(MM)

Addressable

Scripts

(MM)

Market

Share

(%)

Medicare

Advantage 4.8 ~130 23%

Stand-alone

PDP 4.7 ~130 15%

Medicaid 6.7 ~180 11%

Commercial 26.8 ~720 18%

Total 43.0 ~1,160 -

UnitedHealth Revenues (FY 2017)

($201.2 Billion)

Optum Rx $63.8B Revenue

UnitedHealthcare $163.3B Revenue

Source: Company data

~1.3Billion Adj. Scripts

* As of 2Q’ 18

Optum Rx Market Share (%)


Pharmaceuticals: Generic Drug Profits – Everybody Wants Some

Reimburse for the majority of the cost of most drugs;

capture an opaque portion of generic economics

Manufacturer

PBMs

Buying Groups Three group represent 90% of US generics drug procurement

Manufacturers Would like an “alternate channel’ to reach customers and circumvent buying

groups. We are skeptical that Amazon will be a savior for generic manufacturers

Distributor Pharmacy Patient

PBMs

Buying Groups



Digging Into Healthcare

Industry/Business


Regulatory Hurdles



B R I A N


He

alt

hca

re S

vc

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& D

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ibu

tio

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Lif

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cie

nc

e

To

ols

& D

en

tal

Me

dic

al

De

vic

es

Life Science Tools Dental Distributors

Implanters & Capital Equipment

Supplies & Instruments

PBM/Drug Distribution

Drug Retail

Pharmaceuticals

Ph

arm

a


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http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiTydij-KfWAhVL74MKHfLSAF8QjRwIBw&url=http://elasticmusicproductions.com/commercial/&psig=AFQjCNHjsgjpN5MSDQo2plyVwbgNXr8oSQ&ust=1505590521707875

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiBpdHB-KfWAhWMSRoKHfKMAjsQjRwIBw&url=https://en.wikipedia.org/wiki/File:Express_Scripts_logo.svg&psig=AFQjCNGELr1XaFTTdQFgwO08QfZu9NOBhQ&ust=1505590684362275

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiJ-rO9zsbXAhUEiRoKHfzaDM0QjRwIBw&url=https://commons.wikimedia.org/wiki/File:AmerisourceBergen_logo.svg&psig=AOvVaw30vIwEG50UUV1dWOytvqGx&ust=1511042585864929

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjYs47b-KfWAhWJ7IMKHS4-C_gQjRwIBw&url=https://cvshealth.com/social-responsibility/our-giving/foundation-giving&psig=AFQjCNFzvTOgcYOwwaBGfAkrrziMu2e7xA&ust=1505590715919251

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwj8-9-x1cbXAhWBXhoKHcZoCC0QjRwIBw&url=https://en.wikipedia.org/wiki/File:Walgreens_Logo.svg&psig=AOvVaw2mRsSFd7OoO0BRtucRA73j&ust=1511044453774431

Disclosures


North America

Amazon Disruption


Disclosures The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. LLC, and/or Morgan Stanley C.T.V.M. S.A., and/or Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., and/or Morgan Stanley Canada Limited. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. LLC, Morgan Stanley C.T.V.M. S.A., Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., Morgan Stanley Canada Limited and their affiliates as necessary.

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Analyst Certification

The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Lauren Cassel; Ricky R Goldwasser; Kimberly C Greenberger; Simeon Gutman, CFA; Adam Jonas, CFA; Dara Mohsenian, CFA; Brian Nowak, CFA; David Risinger; Vincent J Sinisi.

Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.

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Important US Regulatory Disclosures on Subject Companies

The following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Brian Nowak, CFA - TAPESTRY INC(common or preferred stock).

As of August 31, 2018, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Abercrombie & Fitch Co., Activision Blizzard Inc, Alphabet Inc., Amazon.com Inc, American Axle & Manufacturing Holdings Inc, Asbury Automotive Group Inc, athenahealth Inc, Avis Budget Group Inc, BECLE SA de CV, Big Lots Inc, Booking Holdings Inc, Church & Dwight Co., Inc., Clorox Co, Coca-Cola Co., Constellation Brands Inc, Costco Wholesale Corp, Criteo SA, CVS Health Corp, Dean Foods Co, Despegar.com Corp, Dollar General Corporation, Endo International plc, Etsy Inc, Facebook Inc, Fiat Chrysler Automobiles NV, Ford Motor Company, General Mills Inc, Goodyear Tire & Rubber Company, Group 1 Automotive, Inc, Groupon, Inc., GrubHub Inc., Horizon Pharma PLC, J.C. Penney Co., Kimberly-Clark Corp, Kraft Heinz Co, L Brands Inc, Laboratory Corp. of America Holdings, Lowe's Companies Inc, Mallinckrodt Plc, Party City Holdco Inc, PepsiCo Inc., Pfizer Inc, Snap Inc., Supervalu Inc, Take-Two Interactive Software, Tesla Inc, TrueCar Inc, Tupperware Brands Corp., Twitter Inc, Yelp Inc, Zillow Group Inc, Zoetis Inc., Zynga Inc. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Abbvie Inc., Acushnet Holdings Corp, At Home Group Inc, Bausch Health Companies Inc, BJ'S Wholesale Club, Catalent, Inc., Clorox Co, Colgate-Palmolive Co, Coty Inc, Eli Lilly & Co., Etsy Inc, Express Scripts, Inc., Ford Motor Company, General Mills Inc, General Motors Company, Hudson Ltd., Iqvia Holdings Inc, Mylan Inc., Party City Holdco Inc, Pfizer Inc, Procter & Gamble Co., Teva Pharmaceutical Industries Ltd., Twitter Inc, US Foods Holding Corp., Wal-Mart Stores Inc, Weight Watchers International, Inc..

Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Abbvie Inc., Alkermes Plc., Alphabet Inc., AmerisourceBergen Corp., Aptiv Plc, At Home Group Inc, Avis Budget Group Inc, Bausch Health Companies Inc, BJ'S Wholesale Club, Bristol-Myers Squibb Co, Catalent, Inc., Charles River Laboratories International, Clorox Co, Coca-Cola Co., Colgate-Palmolive Co, Coty Inc, Diplomat Pharmacy Inc, Electronic Arts Inc, Eli Lilly & Co., Etsy Inc, Express Scripts, Inc., Fiat Chrysler Automobiles NV, Ford Motor Company, General Mills Inc, General Motors Company, Hershey Co, Home Depot Inc, Hostess Brands Inc, Inovalon Holdings Inc, Kellogg Co., Kimberly-Clark Corp, Kohl's, Kroger Co., Mallinckrodt Plc, Mylan Inc., Newell Rubbermaid Inc., Nordstrom, PepsiCo Inc., Pfizer Inc, Pinnacle Foods Inc, Procter & Gamble Co., Teva Pharmaceutical Industries Ltd., Twitter Inc, Valvoline Inc., Wal-Mart Stores Inc, Walgreens Boots Alliance Inc, Weight Watchers International, Inc..

In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Abbvie Inc., Abercrombie & Fitch Co., Activision Blizzard Inc, Acushnet Holdings Corp, Advance Auto Parts Inc, Alkermes Plc., Allergan Plc, Allscripts Healthcare Solutions Inc., Alphabet Inc., Amazon.com Inc, AmerisourceBergen Corp., Aptiv Plc, ASSERTIO THERAPEUTICS INC, athenahealth Inc, AutoZone Inc., Avis Budget Group Inc, Bausch Health Companies Inc, BECLE SA de CV, Bed Bath & Beyond Inc., Best Buy Co Inc, BJ'S Wholesale Club, Blue Apron Holdings Inc, Booking Holdings Inc, BorgWarner Inc., Bristol-Myers Squibb Co, Brown-Forman Corporation, Burlington Stores Inc, Cardinal Health Inc, Catalent, Inc., Cerner Corporation, Charles River Laboratories International, Church & Dwight Co., Inc., Clorox Co, Coca-Cola Co., Colgate-Palmolive Co, Conagra Brands, Constellation Brands Inc, Costco Wholesale Corp, Coty Inc, Criteo SA, Dean Foods Co, Despegar.com Corp, Dick's Sporting Goods, Diplomat Pharmacy Inc, Dollar General Corporation, Dollar Tree Inc, eBay Inc, Edgewell Personal Care, Electronic Arts Inc, elf Beauty, Eli Lilly & Co., Endo International plc, Energizer Holdings Inc., Estee Lauder Companies Inc, Etsy Inc, Expedia Inc., Express Scripts, Inc., Facebook Inc, Ferrari NV, Fiat Chrysler Automobiles NV, Ford Motor Company, Gap Inc, General Mills Inc, General Motors Company, GNC Holdings Inc, Goodyear Tire & Rubber Company, Groupon, Inc., GrubHub Inc., Harley-Davidson Inc, Hershey Co, Home Depot Inc, Horizon Pharma PLC, Hostess Brands Inc, Hudson Ltd., Inovalon Holdings Inc, Iqvia Holdings Inc, J. Jill Inc, J. M. Smucker Co, J.C. Penney Co., Jazz Pharmaceuticals PLC, Kellogg Co., Kimberly-Clark Corp, Kohl's, Kraft Heinz Co, Kroger Co., Laboratory Corp. of America Holdings, Lear Corporation, Lowe's Companies Inc, Lululemon Athletica Inc., Macy's Inc., Magna International Inc., Mallinckrodt Plc, McKesson Corporation, Medidata Solutions Inc., Merck & Co., Inc., Michael Kors Holdings Ltd, Molson Coors Brewing Co, Mondelez International Inc, Monster Beverage Corp, Mylan Inc., Newell Rubbermaid Inc., Nextgen Healthcare Inc, Nordstrom, O'Reilly Automotive Inc, Party City Holdco Inc, PepsiCo Inc., Performance Food Group Co, Pfizer Inc, Pinnacle Foods Inc, Procter & Gamble Co., Quest Diagnostics Inc., Snap Inc., Sprouts Farmers Market Inc, Sysco Corp, Take-Two Interactive Software, TAPESTRY INC, Target Corp, Tenneco Inc., Tesla Inc, Teva Pharmaceutical Industries Ltd., The Michaels Companies, Inc., Tiffany & Co., TJX Companies Inc., Tractor Supply Co, TRIVAGO NV, TrueCar Inc, Twitter Inc, Ulta Beauty Inc, US Foods Holding Corp., Valvoline Inc., Visteon Corporation, Wal-Mart Stores Inc, Walgreens Boots Alliance Inc, Weight Watchers International, Inc., Williams-Sonoma Inc, Yelp Inc, Zillow Group Inc, Zoetis Inc., Zynga Inc.


Disclosures Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Abbvie Inc., Advance Auto Parts Inc, Allergan Plc, Alphabet Inc., Amazon.com Inc, American Axle & Manufacturing Holdings Inc, AmerisourceBergen Corp., Aptiv Plc, Avis Budget Group Inc, Bausch Health Companies Inc, Booking Holdings Inc, BorgWarner Inc., Bristol-Myers Squibb Co, Burlington Stores Inc, Cardinal Health Inc, Catalent, Inc., Church & Dwight Co., Inc., Coca-Cola Co., Colgate-Palmolive Co, Conagra Brands, Constellation Brands Inc, Coty Inc, CVS Health Corp, Dean Foods Co, Dollar General Corporation, eBay Inc, Edgewell Personal Care, Electronic Arts Inc, Eli Lilly & Co., Endo International plc, Expedia Inc., Express Scripts, Inc., Facebook Inc, Fiat Chrysler Automobiles NV, Ford Motor Company, General Mills Inc, General Motors Company, GNC Holdings Inc, Goodyear Tire & Rubber Company, Harley-Davidson Inc, Home Depot Inc, Inovalon Holdings Inc, Iqvia Holdings Inc, J. M. Smucker Co, J.C. Penney Co., Kellogg Co., Kimberly-Clark Corp, Kohl's, Kroger Co., Lear Corporation, Lowe's Companies Inc, Macy's Inc., Mallinckrodt Plc, McKesson Corporation, Merck & Co., Inc., Molson Coors Brewing Co, Mondelez International Inc, Mylan Inc., Newell Rubbermaid Inc., Nordstrom, O'Reilly Automotive Inc, Party City Holdco Inc, PepsiCo Inc., Pfizer Inc, Pinnacle Foods Inc, Procter & Gamble Co., Quest Diagnostics Inc., Supervalu Inc, Sysco Corp, Tenneco Inc., Tesla Inc, Teva Pharmaceutical Industries Ltd., The Michaels Companies, Inc., Tupperware Brands Corp., US Foods Holding Corp., Valvoline Inc., Visteon Corporation, Wal- Mart Stores Inc, Walgreens Boots Alliance Inc, Weight Watchers International, Inc., Zoetis Inc..

Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Abbvie Inc., Abercrombie & Fitch Co., Activision Blizzard Inc, Acushnet Holdings Corp, Advance Auto Parts Inc, Alkermes Plc., Allergan Plc, Allscripts Healthcare Solutions Inc., Alphabet Inc., Amazon.com Inc, AmerisourceBergen Corp., Aptiv Plc, ASSERTIO THERAPEUTICS INC, At Home Group Inc, athenahealth Inc, AutoZone Inc., Avis Budget Group Inc, Bausch Health Companies Inc, BECLE SA de CV, Bed Bath & Beyond Inc., Best Buy Co Inc, BJ'S Wholesale Club, Blue Apron Holdings Inc, Booking Holdings Inc, BorgWarner Inc., Bristol-Myers Squibb Co, Brown-Forman Corporation, Burlington Stores Inc, Cardinal Health Inc, Catalent, Inc., Cerner Corporation, Charles River Laboratories International, Church & Dwight Co., Inc., Clorox Co, Coca-Cola Co., Colgate-Palmolive Co, Conagra Brands, Constellation Brands Inc, Costco Wholesale Corp, Coty Inc, Criteo SA, Dean Foods Co, Despegar.com Corp, Dick's Sporting Goods, Diplomat Pharmacy Inc, Dollar General Corporation, Dollar Tree Inc, eBay Inc, Edgewell Personal Care, Electronic Arts Inc, elf Beauty, Eli Lilly & Co., Endo International plc, Energizer Holdings Inc., Estee Lauder Companies Inc, Etsy Inc, Expedia Inc., Express Scripts, Inc., Facebook Inc, Ferrari NV, Fiat Chrysler Automobiles NV, Ford Motor Company, Gap Inc, General Mills Inc, General Motors Company, GNC Holdings Inc, Goodyear Tire & Rubber Company, Groupon, Inc., GrubHub Inc., Harley-Davidson Inc, Hershey Co, Home Depot Inc, Horizon Pharma PLC, Hostess Brands Inc, Hudson Ltd., Inovalon Holdings Inc, Iqvia Holdings Inc, J. Jill Inc, J. M. Smucker Co, J.C. Penney Co., Jazz Pharmaceuticals PLC, Kellogg Co., Kimberly-Clark Corp, Kohl's, Kraft Heinz Co, Kroger Co., Laboratory Corp. of America Holdings, Lear Corporation, Lowe's Companies Inc, Lululemon Athletica Inc., Macy's Inc., Magna International Inc., Mallinckrodt Plc, McKesson Corporation, Medidata Solutions Inc., Merck & Co., Inc., Michael Kors Holdings Ltd, Molson Coors Brewing Co, Mondelez International Inc, Monster Beverage Corp, Mylan Inc., Newell Rubbermaid Inc., Nextgen Healthcare Inc, Nordstrom, O'Reilly Automotive Inc, Party City Holdco Inc, PepsiCo Inc., Performance Food Group Co, Pfizer Inc, Pinnacle Foods Inc, Procter & Gamble Co., Quest Diagnostics Inc., Snap Inc., Sprouts Farmers Market Inc, Sysco Corp, Take-Two Interactive Software, TAPESTRY INC, Target Corp, Tenneco Inc., Tesla Inc, Teva Pharmaceutical Industries Ltd., The Michaels Companies, Inc., Tiffany & Co., TJX Companies Inc., Tractor Supply Co, TRIVAGO NV, TrueCar Inc, Twitter Inc, Ulta Beauty Inc, US Foods Holding Corp., Valvoline Inc., Visteon Corporation, Wal-Mart Stores Inc, Walgreens Boots Alliance Inc, Weight Watchers International, Inc., Williams-Sonoma Inc, Yelp Inc, Zillow Group Inc, Zoetis Inc., Zynga Inc.

Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Abbvie Inc., Activision Blizzard Inc, Advance Auto Parts Inc, Alkermes Plc., Allergan Plc, Alphabet Inc., Amazon.com Inc, American Axle & Manufacturing Holdings Inc, AmerisourceBergen Corp., Aptiv Plc, Avis Budget Group Inc, Bausch Health Companies Inc, BECLE SA de CV, Booking Holdings Inc, BorgWarner Inc., Bristol-Myers Squibb Co, Brown-Forman Corporation, Burlington Stores Inc, Cardinal Health Inc, Catalent, Inc., Cerner Corporation, Charles River Laboratories International, Church & Dwight Co., Inc., Clorox Co, Coca-Cola Co., Colgate-Palmolive Co, Conagra Brands, Constellation Brands Inc, Coty Inc, CVS Health Corp, Dean Foods Co, Dollar General Corporation, eBay Inc, Edgewell Personal Care, Electronic Arts Inc, Eli Lilly & Co., Endo International plc, Etsy Inc, Expedia Inc., Express Scripts, Inc., Facebook Inc, Fiat Chrysler Automobiles NV, Ford Motor Company, General Mills Inc, General Motors Company, GNC Holdings Inc, Goodyear Tire & Rubber Company, Groupon, Inc., Harley-Davidson Inc, Home Depot Inc, Inovalon Holdings Inc, Iqvia Holdings Inc, J. M. Smucker Co, J.C. Penney Co., Kellogg Co., Kimberly-Clark Corp, Kohl's, Kraft Heinz Co, Kroger Co., Lear Corporation, Lowe's Companies Inc, Macy's Inc., Mallinckrodt Plc, McKesson Corporation, Merck & Co., Inc., Molson Coors Brewing Co, Mondelez International Inc, Mylan Inc., Newell Rubbermaid Inc., Nordstrom, O'Reilly Automotive Inc, Party City Holdco Inc, PepsiCo Inc., Pfizer Inc, Pinnacle Foods Inc, Procter & Gamble Co., Quest Diagnostics Inc., Sonic Automotive Inc, Supervalu Inc, Sysco Corp, Tenneco Inc., Tesla Inc, Teva Pharmaceutical Industries Ltd., The Michaels Companies, Inc., TJX Companies Inc., Tupperware Brands Corp., Twitter Inc, US Foods Holding Corp., Valvoline Inc., Visteon Corporation, Wal-Mart Stores Inc, Walgreens Boots Alliance Inc, Weight Watchers International, Inc., Zoetis Inc., Zynga Inc.

An employee, director or consultant of Morgan Stanley is a director of CVS Health Corp, eBay Inc, Estee Lauder Companies Inc, Kroger Co., Merck & Co., Inc., Wal-Mart Stores Inc. This person is not a research analyst or a member of a research analyst's household.

Morgan Stanley & Co. LLC makes a market in the securities of Abbvie Inc., Abercrombie & Fitch Co., Activision Blizzard Inc, Acushnet Holdings Corp, Advance Auto Parts Inc, Alkermes Plc., Allergan Plc, Allscripts Healthcare Solutions Inc., Alphabet Inc., Amazon.com Inc, American Axle & Manufacturing Holdings Inc, American Eagle Outfitters, Inc., AmerisourceBergen Corp., Amneal Pharmaceuticals Inc, Aptiv Plc, Asbury Automotive Group Inc, ASSERTIO THERAPEUTICS INC, athenahealth Inc, AutoNation Inc., AutoZone Inc., Avis Budget Group Inc, Bausch Health Companies Inc, Bed Bath & Beyond Inc., Best Buy Co Inc, Big Lots Inc, BorgWarner Inc., Bristol-Myers Squibb Co, Brown-Forman Corporation, Burlington Stores Inc, Cardinal Health Inc, Carmax Inc, Catalent, Inc., Cerner Corporation, Charles River Laboratories International, Chico's FAS Inc., Church & Dwight Co., Inc., Clorox Co, Coca-Cola Co., Coca-Cola European Partners PLC, Colgate-Palmolive Co, Conagra Brands, Constellation Brands Inc, Costco Wholesale Corp, Coty Inc, Criteo SA, CVS Health Corp, Dean Foods Co, Delphi Technologies PLC, Dick's Sporting Goods, Diplomat Pharmacy Inc, Dollar General Corporation, Dollar Tree Inc, eBay Inc, Edgewell Personal Care, Electronic Arts Inc, Eli Lilly & Co., Endo International plc, Energizer Holdings Inc., Estee Lauder Companies Inc, Etsy Inc, Expedia Inc., Express Scripts, Inc., Facebook Inc, Ferrari NV, Fiat Chrysler Automobiles NV, Five Below Inc, Ford Motor Company, Gap Inc, General Mills Inc, General Motors Company, GNC Holdings Inc, Goodyear Tire & Rubber Company, Group 1 Automotive, Inc, Groupon, Inc., GrubHub Inc., Harley-Davidson Inc, Hershey Co, Home Depot Inc, Horizon Pharma PLC, Hostess Brands Inc, Inovalon Holdings Inc, Iqvia Holdings Inc, J. M. Smucker Co, J.C. Penney Co., Jazz Pharmaceuticals PLC, Kellogg Co., Kimberly-Clark Corp, Kohl's, Kraft Heinz Co, Kroger Co., L Brands Inc, Laboratory Corp. of America Holdings, Lear Corporation, Lithia Motors Inc., Lowe's Companies Inc, Lululemon Athletica Inc., Lumber Liquidators Holdings Inc, Macy's Inc., Magna International Inc., Mallinckrodt Plc, McKesson Corporation, Medidata Solutions Inc., Merck & Co., Inc., Michael Kors Holdings Ltd, Molson Coors Brewing Co, Mondelez International Inc, Monster Beverage Corp, Mylan Inc., Newell Rubbermaid Inc., Nextgen Healthcare Inc, Nordstrom, O'Reilly Automotive Inc, Ollie's Bargain Outlet Holdings Inc, Party City Holdco Inc, Penske Automotive Group, Inc, PepsiCo Inc., Performance Food Group Co, Perrigo Co., Pfizer Inc, Phibro Animal Health Corp, Pier 1 Imports, Inc., Pinnacle Foods Inc, Procter & Gamble Co., Quest Diagnostics Inc., Ross Stores Inc., Sally Beauty Holdings Inc, Smart & Final Stores, Inc., Sonic Automotive Inc, Sprouts Farmers Market Inc, Supervalu Inc, Sysco Corp, Take-Two Interactive Software, TAPESTRY INC, Target Corp, Tenneco Inc., Tesla Inc, Teva Pharmaceutical Industries Ltd., The Michaels Companies, Inc., Tiffany & Co., TJX Companies Inc., Tractor Supply Co, TrueCar Inc, Tupperware Brands Corp., Twitter Inc, Ulta Beauty Inc, United Natural Foods Inc., Urban Outfitters Inc., US Foods Holding Corp.,


Disclosures Visteon Corporation, Vitamin Shoppe Inc, Wal-Mart Stores Inc, Walgreens Boots Alliance Inc, Wayfair Inc, Weight Watchers International, Inc., Williams-Sonoma Inc, Yelp Inc, Zillow Group Inc, Zoetis Inc., Zynga Inc.

The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Equity Research analysts' or strategists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Morgan Stanley trades or may trade as principal in the debt securities (or in related derivatives) that are the subject of the debt research report.

Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.

STOCK RATINGS

Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.

Global Stock Ratings Distribution

(as of August 31, 2018)

The Stock Ratings described below apply to Morgan Stanley's Fundamental Equity Research and do not apply to Debt Research produced by the Firm. For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Due to rounding off of decimals, the percentages provided in the "% of total" column may not add up to exactly 100 percent.

Analyst Stock Ratings

Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.

Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.

Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.

Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.

Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.


Disclosures Analyst Industry Views

Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below.

In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.

Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.

Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.

Important Disclosures for Morgan Stanley Smith Barney LLC Customers

Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC or Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website at www.morganstanley.com/online/researchdisclosures. For Morgan Stanley specific disclosures, you may refer to www.morganstanley.com/researchdisclosures.

Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest.

Other Important Disclosures

Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of Abbvie Inc., Activision Blizzard Inc, Allscripts Healthcare Solutions Inc., Alphabet Inc., Amazon.com Inc, AmerisourceBergen Corp., ASSERTIO THERAPEUTICS INC, AutoZone Inc., Avis Budget Group Inc, Bausch Health Companies Inc, Bed Bath & Beyond Inc., Best Buy Co Inc, Booking Holdings Inc, BorgWarner Inc., Bristol-Myers Squibb Co, Cardinal Health Inc, Clorox Co, Coca-Cola Co., Colgate-Palmolive Co, Conagra Brands, Constellation Brands Inc, Costco Wholesale Corp, Coty Inc, CVS Health Corp, Dean Foods Co, Diplomat Pharmacy Inc, Dollar General Corporation, eBay Inc, Electronic Arts Inc, Eli Lilly & Co., Etsy Inc, Expedia Inc., Express Scripts, Inc., Facebook Inc, Ferrari NV, Fiat Chrysler Automobiles NV, Ford Motor Company, Gap Inc, General Mills Inc, General Motors Company, Goodyear Tire & Rubber Company, Groupon, Inc., Hershey Co, Home Depot Inc, Inovalon Holdings Inc, J.C. Penney Co., Kellogg Co., Kimberly-Clark Corp, Kohl's, Kroger Co., L Brands Inc, Laboratory Corp. of America Holdings, Lowe's Companies Inc, Macy's Inc., McKesson Corporation, Merck & Co., Inc., Molson Coors Brewing Co, Mondelez International Inc, Mylan Inc., Newell Rubbermaid Inc., Nordstrom, Penske Automotive Group, Inc, PepsiCo Inc., Pfizer Inc, Procter & Gamble Co., Quest Diagnostics Inc., Snap Inc., Supervalu Inc, Sysco Corp, Target Corp, Tenneco Inc., Tesla Inc, Teva Pharmaceutical Industries Ltd., TJX Companies Inc., Twitter Inc, Valvoline Inc., Wal-Mart Stores Inc, Walgreens Boots Alliance Inc, Wayfair Inc, Weight Watchers International, Inc., Zillow Group Inc.

Morgan Stanley Research policy is to update research reports as and when the Research Analyst and Research Management deem appropriate, based on developments with the issuer, the sector, or the market that may have a material impact on the research views or opinions stated therein. In addition, certain Research publications are intended to be updated on a regular periodic basis (weekly/monthly/quarterly/annual) and will ordinarily be updated with that frequency, unless the Research Analyst and Research Management determine that a different publication schedule is appropriate based on current conditions. Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Matrix at http://www.morganstanley.com/matrix. Morgan Stanley Research is provided to our clients through our proprietary research portal on Matrix and also distributed electronically by Morgan Stanley to clients. Certain, but not all, Morgan Stanley Research products are also made available to clients through third-party vendors or redistributed to clients through alternate electronic means as a convenience. For access to all available Morgan Stanley Research, please contact your sales representative or go to Matrix at http://www.morganstanley.com/matrix.

Any access and/or use of Morgan Stanley Research is subject to Morgan Stanley's Terms of Use (http://www.morganstanley.com/terms.html). By accessing and/or using Morgan Stanley Research, you are indicating that you have read and agree to be bound by our Terms of Use (http://www.morganstanley.com/terms.html). In addition you consent to Morgan Stanley processing your personal data and using cookies in accordance with our Privacy Policy and our Global Cookies Policy (http://www.morganstanley.com/privacy_pledge.html), including for the purposes of setting your preferences and to collect readership data so that we can deliver better and more personalized service and products to you. To find out more information about how Morgan Stanley processes personal data, how we use cookies and how to reject cookies see our Privacy Policy and our Global Cookies Policy (http://www.morganstanley.com/privacy_pledge.html).

If you do not agree to our Terms of Use and/or if you do not wish to provide your consent to Morgan Stanley processing your personal data or using cookies please do not access our research.

Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the circumstances and objectives of those who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments.


Disclosures The fixed income research analysts, strategists or economists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts', strategists' or economists‘ compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks.

The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives of securities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons.

With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.

Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved by authorized members of Research management.

Morgan Stanley may make investment decisions that are inconsistent with the recommendations or views in this report.

To our readers based in Taiwan or trading in Taiwan securities/instruments: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Any non-customer reader within the scope of Article 7-1 of the Taiwan Stock Exchange Recommendation Regulations accessing and/or receiving Morgan Stanley Research is not permitted to provide Morgan Stanley Research to any third party (including but not limited to related parties, affiliated companies and any other third parties) or engage in any activities regarding Morgan Stanley Research which may create or give the appearance of creating a conflict of interest. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments.

Morgan Stanley is not incorporated under PRC law and the research in relation to this report is conducted outside the PRC. Morgan Stanley Research does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses, verifications and/or registrations from the relevant governmental authorities themselves. Neither this report nor any part of it is intended as, or shall constitute, provision of any consultancy or advisory service of securities investment as defined under PRC law. Such information is provided for your reference only.

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Disclosures Comments and recommendations stated here are general in nature. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations.

The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P.

Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley.


Disclosures


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